Question

Hali’s current stock price is $36.00, its last dividend was $2.40, and its required rate of return is 12%. If dividends are expected to grow at a constant rate, g, in the future, and if the required rate of return is expected to remain at 12%, what is Hali’s expected stock price 5 years from now?

a) The constant growth rate =   %

b) Expected stock price 5 years from now =  

Answer 1

	using the constant growth rate formula,
	Po = Do(1+g)/Ke-g
	Where,
	po= Price of the stock
	D0= Dividend last paid
	g= Constant growth rate
	Ke= Required rate of return
	Therefore,
a)	PoKe-Pog=Do+Dog
	g(Do+Po)=PoKe-Do
	g=(PoKe-Do)/(Do+Po)
	=($36*12%-$2.40)/($2.40+$36)
	= $1.92/$38.4
	= 0.05 or 5%
	Constant growth rate = 5%
b)	Price 5 years from now = Do(1+g)^6/Ke-g
	= $2.40(1.05)^6/(0.12-0.05)
	= $3.216/0.07
	= $45.94