A stock's current price is $56. Investors require a 14% rate of return and dividends are...

A stock's current price is $56. Investors require a 14% rate of return and dividends are expected to grow at 2% indefinitely. What is the expected price of the stock next year?

A firm is not expected to pay a dividend for the next three years. If the expected share price of the firm in three years is $54 and investors require a 10% rate of return, what is the expected share price today?

Expert Solution

1)

Current Price = [Next Year's Dividend]/[Required Return-Growth Rate]

56 = D/[14%-2%]

Therefore, Next Year's Dividend = D = 56*12% = $6.72

Expected Price Next Year = [Next Year's Dividend*(1+Growth Rate)]/[Required Return-Growth Rate] = [6.72*(1+0.02)]/[0.14-0.02] = 6.8544/0.12 = $57.12

2)

Expected Share Price Today = [Share Price after 3 years]/[(1+Required Return)^3] = 54/[(1+0.1)^3] = 54/1.331 = $40.57

jeff jeffy answered 2 years ago

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