In: Finance
Fowler, Inc., just paid a dividend of $2.55 per share on its stock. The dividends are expected to grow at a constant rate of 3.9 percent per year, indefinitely. If investors require a return of 10.4 percent on this stock, what is the current price? What will the price be in three years? In 15 years?
Part A:
P0 = D1 / (Ke - g)
P0 = Current Price
D1 = Expected Div after 1 Year
Ke = COst of Equity
g = Growth Rate
D1 = D0(1+g)
= $ 2.55 (1+0.039)
= $ 2.55(1.039)
= $ 2.6495
P0 = D1 / (Ke - g)
= $ 2.6495 / (0.104-0.039)
= $ 2.6495 / 0.065
= $ 40.76
Part B:
P3 = D4 / (Ke - g)
P3 = Price after 3 Years
D4 = Expected Div after 4 Years
Ke = COst of Equity
g = Growth Rate
D4 = D0(1+g)^4
= $ 2.55 (1+0.039)^4
= $ 2.55(1.039)^4
= $2.55 * 1.1654
= $ 2.9717
P3 = D4 / (Ke - g)
= $ 2.9717 / (0.104-0.039)
= $ 2.9717 / 0.065
= $ 45.72
Part c:
P15 = D16 / (Ke - g)
P15 = Price after 15 Years
D16 = Expected Div after 16 Years
Ke = COst of Equity
g = Growth Rate
D16 = D0(1+g)^16
= $ 2.55 (1+0.039)^16
= $ 2.55(1.039)^16
= $2.55 * 1.8444
= $ 4.7031
P15 = D16 / (Ke - g)
= $ 4.7031 / (0.104-0.039)
= $ 4.7031 / 0.065
= $ 72.36