Chicago Ice Cream Co. just paid a dividend of $6.00 per share. The company will increase...

Chicago Ice Cream Co. just paid a dividend of $6.00 per share. The company will increase its dividend by 20% next year, and then will reduce this dividend growth rate by 5% a year until it reaches the industry average of 5%, after which the company will keep a constant growth rate forever. The required rate of return on Chicago stock is 10%.

a. What is the current price per share for Chicago?

b. What is the expected price per share for Chicago next year?

c. What is the expected price per share for Chicago five years from today?

Solutions

Expert Solution

To calculate the price next year, we need to assume that as the present day and take dividends values from 2nd year onwards

D4 = 9.5634

D5 = 9.5634 * 1.05 = 10.04

Since growth rate after year 5 is constant

Price = 10.04 * (1+g)/(r-g)

g = 5%

r = 10%

Price = 10.04 *1.05 / (0.1 - 0.05) = 218.4

LET ME KNOW IF YOU HAVE ANY DOUBTS

jeff jeffy answered 1 year ago

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