Question

Dynamic Industries paid a dividend of $1.65 on its common stock yesterday. The dividends of Wallace Industries are expected to grow at 9% per year indefinitely. If the risk-free rate is 3% and investors' risk premium on this stock is 8%, estimate the value of Wallace Industries stock 2 years from now.

Answer 1

For dynamic Industries paid a dividend of $1.65 on its common stock yesterday, the value of Wallace Industries stock 2 years from now is mathematically given as

SV= 106.84

What is the value of stock in 2 years?

Generally, the equation for the rate of return is mathematically given as

Ke = Rf + risk premium

Therefore

Ke= 3% + 8%

Ke=11%

Hence

D3=Do*(1+g)^3

D3=1.65 x (1+0.09)^3

Do= 2.137

In conclusion, the value of stock in 2 years is

SV= D3/ (Ke-g)

Therefore

SV= 2.137/(0.11-0.09

SV= 106.84

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