Question

The Starr Co. just paid a dividend of $1.65 per share on its stock. The dividends are expected to grow at a constant rate of 5 percent per year, indefinitely. Investors require a return of 12 percent on the stock. What is the current price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) What will the price be in three years? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) What will the price be in 14 years?

Answer 1

Answer:

(a) $24.75

(b) $28.651

(c) $49

Explanation:

Given that,

Dividend paid recently = $1.65 per share

Growth rate of dividend, g = 5% per year

Return require, rr = 12 percent

(a) Current price:

= [Dividend paid × (1 + g)] ÷ (rr - g)

= [$1.65 × (1 + 0.05)] ÷ (0.12 - 0.05)

= $1.7325 ÷ 0.07

= $24.75

(b) Price in three years:

= Current price × (1 + g)^(3)

= $24.75 × (1 + 0.05)^(3)

= $24.75 × (1.05)^(3)

= $24.75 × 1.157625

= $28.651

(c) Price in 14 years:

= Current price × (1 + g)^(14)

= $24.75 × (1 + 0.05)^(14)

= $24.75 × (1.05)^(14)

= $24.75 × 1.9799316

= $49