A stock just paid an annual dividend of $5.3. The dividend is expected to grow by 4% per year for the next 4 years. In 4 years, the P/E ratio is expected to be 21 and the payout ratio to be 60%.

The required rate of return is 8%.

Part 1

What should be the current stock price?

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Expert Solution

Given information

Dividend paid = $5.3

required rate of return is 8%

Groth rate of dividend = 4% per year for four years

For this problem current stock price is calculated in four steps.

step 1) calculating dividend for year4

step 2) calculating earning pershare at year 4

step 3) calculating market price of share ( stock price) at year 4

step 4) and last calculating present value of dividends and stock price of share at year 4 for computing current stock price.

jeff jeffy answered 2 years ago

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