Question

ABC is expected to pay a dividend of $1.25 every six months for the next four years. the current share price is $25.76 and the relevant discount rate is 14% compounded semiannually. what do you expect the share price at the end of year 4 be?

Answer 1

The expected future price of the stock at the end of year 4, P4 = P0 * (1 + r)^n

r = 14%/2 = 0.07 per semi-annual period

n = 4 * 2 = 8 semi-annual period

P4 = 25.76 * (1 + 0.07)^8

P4 = 25.76 * 1.7181861798

P4 = $44.2604759916

The expected future price of the stock at the end of year 4 is $44.2604759916