Question
In: Finance
A share currently sells for $14 a share. Its dividend is growing at a constant rate, and its dividend yield is 7 percent.
A share currently sells for $14 a share. Its dividend is growing at a constant rate, and its dividend yield is 7 percent. The required rate of return on the company’s share is expected to remain constant at 14 percent per year. What is the expected share price (to the nearest dollar) five years from now?
Solutions
Expert Solution
- Dividend Yield = Annual Dividend paid/Current Share Price
0.07 = Annual Dividend paid/$14
Annual Dividend paid(D1) = $0.98
Required rate of return(ke) = 14%
Current Price(P0) = $14
Calculating the Growth rate of Dividend:-
g = 7%
Now, Calculating the expected share price (to the nearest dollar) five years from now:-
P5 = $19.63
So, the expected share price (to the nearest dollar) five years from now is $20
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