Question

JNJ just paid a dividend of $1.46 per share on its stock. The dividends are expected to grow at a constant rate of 3.5 percent per year, indefinitely. What will the price of this stock be in 5 years if investors require an annual return of 15 percent?

Answer 1

$15.61

Step-by-step explanation:

The Dividend valuation Model would be used to value the stock which is given as under:

Po = Do * (1 + g) / (r - g)

Here

Po is the value of stock now

Do is the dividend just paid

g is the dividend growth rate

And

r is the required rate of return of the investors.

By putting values, we have:

Po = $1.46 * (1 + 3.5%) / (15% - 3.5%) = $13.14

Now this is the value of stock now, so to find the value of stock after 5 years, we will have to compound this value at the growth rate.

So, mathematically:

Future value of Unit share = Share value Now * (1 + g)^n

Here Future value is at 5 years time which means n = 5 years.

g is 3.5% and share value now is Po which is $13.14 per share.

So by putting values, we have:

Future value of Unit share = $13.14 * (1 + 3.5%)^5 = $15.61 per share