12. XYZ, Inc. just paid $2.00 dividend. Dividends are expected to grow at a 20% rate...

12. XYZ, Inc. just paid $2.00 dividend. Dividends are expected to grow at a 20% rate for the next five years. After that, the company has stated that the annual dividend will be $2.50 per share indefinitely. The required rate of return is 10%.

(a) What is this stock worth to you per share today?

(b) What is the expected stock price next year?

Could you explain the question in detail with formula plz! I don't understand others poster answers.

Solutions

Expert Solution

(a) What is this stock worth to you per share today?

The share price is equal to the present value of future dividends.

The share price today = $28.60

Screenshot of the formula used for easy understanding.

(b) What is the expected stock price next year?

The expected stock price next year is equal to the present value (at year 1) of the future dividends from year 2 onwards.

The dividend in year 2 is discounted for one period, the dividend in year 3 is discounted for 2 periods and so on.

The stock price in year 2 = $29.06

Stock price in 20 years = Dividend in year 21/r

Stock price = 2.50/0.10

Stock price = $25

jeff jeffy answered 1 year ago

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