question archive Assume a company has just paid a dividend of $3
Assume a company has just paid a dividend of $3
Subject:FinancePrice:2.84 Bought6
Assume a company has just paid a dividend of $3.75 a share (DIV0 = $3.75) and a financial analyst has told you that the company plans to increase their dividends per share by a constant amount of 5.5 percent per year indefinitely (this means that the firm's stock behaves as a constant growth stock where g = 5.50%). Planning ahead, your goal is to buy a block of shares of this firm's stock in two (2) years (where a block of stock means buying 100 shares), how much should you expect to pay for each share in two years (P2023). Assume the market rate of return for this type of security is expected to be 13 percent at the time of your purchase (so rE = 0.13)? Also, what will be the total amount of your investment (in dollars) on the date of your purchase in 2023?
Stock Price in Two Years (P2023) =
Total Invested (in $) in Two Years =
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- Stock Price in Two Years (P2023) = $58.71
- Total Invested (in $) in Two Years = $5,871.21
Step-by-step explanation
Stock Price in Two Years (P2023) = Dividend after 3 years / (Required rate - Growth rate)
- Dividend after 3 years = DIV0 * (1+growth rate) ^ 3
- Dividend after 3 years = 3.75 * (1+5.5%)^3 = 4.4034052
Stock Price in Two Years (P2023) = 4.4034052 / (13% - 5.5%) = 58.7121 or 58.71 (Rounded to nearest two decimal places)
Total Invested (in $) in Two Years = Stock Price in Two Years (P2023) * 100
Total Invested (in $) in Two Years = 58.7121 * 100 = 5871.21 (Rounded to nearest two decimal places)
