In: Finance
A company just paid out an annual dividend of $5. The dividend amount will grow at 3% annually forever. If you buy a share today and sell it at year 5, how much of a capital gain (not including the dividend yield) would you expect? Assume that the required rate of return for this stock is 10%.
Group of answer choices
$13.49
$12.74
$11.72
$15.93
Todays share price | ||||
Stock price = D1 / r - g | ||||
Where, | ||||
D1 = Expected Dividend =$5*1.03 =5.15 | ||||
r= required rate of return | ||||
g= growth rate | ||||
=5.15/0.1-0.03 | ||||
=73.57 | ||||
Expected dividend at 6th year | ||||
=$5*1.03^6 | ||||
=5.97026 | ||||
Share price at year 5 = $5.97026/(0.10-0.03) | ||||
=$85.2894 | ||||
Capital gain = $85.2894-73.57 | ||||
=$11.72 | ||||