Question

Fisher Depot just paid an annual dividend of $2.48 per share. Dividends are expected to grow by 7% per year. The required rate of return is 12%.1) What is the best estimate of the current stock price?
2) What is the best estimate of the stock price in 5 years?
3) What is the best estimate of the stock price in 20 years?

Answer 1

Answer and Explanation:

The computation is shown below:

Last years Dividend, D0 = $2.48

Growth Rate, g = 7%

Required Return, r = 12%

Now

D1 = D0 × (1 + g)

= $2.48 × 1.07

= $2.6536

Now

1 The Current Price is

P0 = D1 ÷ (r - g)

= $2.6536 ÷ (12% - 7%)

= $53.072

2. For the stock price in 5 years is

P5 = P0 × (1 + g)^5

= $53.072 × 1.07^5

= $74.436

3. For the stock price in 20 years is

P20 = P0 × (1 + g)^520

= $53.072 × 1.07^20

= $205.37