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Blue Eagle Aviation stock has an expected annual return of 9.59 percent. The stock is currently...

Blue Eagle Aviation stock has an expected annual return of 9.59 percent. The stock is currently priced at 68.72 dollars per share and has an expected dividend yield of 4.16 percent. What is the price of the stock expected to be in 1 year?

Expert Solution

Solution:

The values provided in the question are as follows:

(Ke )Expected annual return = 9.59 % or 0.0959

(Po )currently priced per share = $ 68.72

expected dividend yield = 4.16 percent. Or 0.0416

( D1 ) price of the stock expected to be in 1 year =?

Formula of the Dividend Growth Model:

Po = D1 /Ke – g

currently priced per share = price of the stock expected to be in 1 year/Expected annual return-growth rate

Formula of the Dividend Yield

Dividend yield= annual dividend /currently priced per share

Using the values provided in the question ,

Dividend yield= annual dividend /currently priced per share

0.0416 = annual dividend / 68.72

annual dividend =0.0416 *68.72

( Do ) annual dividend = 2.858752

currently priced per share = price of the stock expected to be in 1 year/Expected annual return-growth rate

68.72 = D1/0.0959- g

68.72 = D0 ( 1+g )/ 0.0959- g

68.72 * (0.0959- g ) = D0 ( 1+g )

6.590248 – 68.72 g = 2.858752 ( 1+g )

6.590248 – 68.72 g= 2.858752 +2.858752 g

6.590248 -2.858752 =2.858752 g +68.72 g

3.731496 = 71.578752 g

( g ) growth =3.731496 /71.578752

( g ) growth =0.0521313364

( g ) growth =0.0521 or 5.21 %

( D1 ) price of the stock expected to be in 1 year = Do ( 1 + g )

( D1 ) price of the stock expected to be in 1 year = 2.858752 (1 +0.0521 )

( D1 ) price of the stock expected to be in 1 year = 2.858752 *1.0521

( D1 ) price of the stock expected to be in 1 year = 3.0076929792

( D1 ) price of the stock expected to be in 1 year =3.00

jeff jeffy answered 6 hours ago

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