Question

Fowler, Inc., just paid a dividend of $2.75 per share on its stock. The dividends are expected to grow at a constant rate of 6.5 percent per year, indefinitely. Assume investors require a return of 11 percent on this stock.

a. What is the current price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
b. What will the price be in three years and in fifteen years? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Answer 1

Stock price now is $65.08

Stock price in 3 years is $78.61

Stock price in 15 years is $ 167.38

Step-by-step explanation:

The current price of the stock is given by the stock price formula below:

stock price=Di*(1+g)/k-g

Di is the dividend just paid of $2.75 per share.

g is the growth rate of dividend of 6.5%

k is the investors' expected return of 11%

stock price=$2.75*(1+6.5%)/(11%-6.5%)=$ 65.08

In calculating stock price in 3 and 15 years,we use the future value formula

FV=PV*(1+r)^n

PV is the current price

r is the growth rate whereas the n is the number of years

Stock in 3 years=$65.08*(1+6.5%)^3=$78.61

Stock in 15 years=$65.08*(1+6.5%)^15=$ 167.38