Question

"Gettysburg Grocers’ "stock is expected to pay a year-end dividend, D1, of $2.00 per share. The dividend is expected to grow at a constant rate of 5%, and the stock has a required return of 9%. What is the expected price of the stock five years from today?

Answer 1

$63.81

Step-by-step explanation:

Current price is computed as follows:

= Expected dividend / (required rate of return - growth rate)

= $ 2 / (9% - 5%)

= $ 50

So, the price in 5 years will be as follows:

= Current price x (1 + growth rate)^5

= $ 50 x 1.05^5

= $50 x 1.2762

= $ 63.81