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XYZ Company's current stock price is $30 per share, its last paid dividend was $2.5 per share, and its required rate of return is 10%.

XYZ Company's current stock price is $30 per share, its last paid dividend was $2.5 per share, and its required rate of return is 10%. If dividends are expected to grow at a constant rate, g, in the future, what is XYZ Company's expected stock price 5 years from now?

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Expert Solution

Current Price = $30.00
Current Dividend = $2.50
Growth Rate = g

Expected Dividend = Current Dividend * (1 + Growth Rate)
Expected Dividend = $2.50 * (1 + g)

Required Rate of Return = Expected Dividend / Current Price + Growth Rate
0.10 = $2.50 * (1 + g) / $30.00 + g
0.10 = 0.083333 + 0.083333 * g + g
0.016667 = 1.083333 * g
g = 0.0154 or 1.54%

Growth Rate = 1.54%

Stock Price in 5 years = Current Price * (1 + Growth Rate)^5
Stock Price in 5 years = $30.00 * 1.0154^5
Stock Price in 5 years = $30.00 * 1.079408
Stock Price in 5 years = $32.38

jeff jeffy answered 2 years ago
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