Answer:
The price of the stock 5 years from today will be $75.43
Explanation:
The perpetual dividend growth means that the stock's dividends will grow at a constant rate forever. For such a stock, we use the constant growth model of DDM. The formula for price today using the constant growth model is:
P0 = D1 / r - g
Where D1 is the dividend in the next period or Year 1 or D0 * (1+g).
To calculate the price of the stock 5 years from now, we will use D6.
The price of the stock 5 years from now is:
P = 3.1 * (1+0.04)^6 / 0.092 - 0.04
P = $75.432 rounded off to $75.43
Answer:
Five years form today the stock will sell for $75.38
Explanation:
Given D0 $3.10, r 9.2%, g 4.0%
Stock price? 5 years from today
The DDM will be used as it derives the stock price by discounting future dividends at the required return .
Need to discount future dividends to year five to find stock price
Find D6
3.10*(1.04)^6 =$3.92
DDM formula : Sp = D1/ r - g
= 3.92/0.092-0.04
=$75.38
