question archive A share of common stock is expected to pay a dividend of $10 in one year (which implies that DIV1 = $10
A share of common stock is expected to pay a dividend of $10 in one year (which implies that DIV1 = $10
Subject:FinancePrice:2.84 Bought6
A share of common stock is expected to pay a dividend of $10 in one year (which implies that DIV1 = $10.00). The stock's dividend is expected to increase at a constant rate of 7% per year (g = 7%), and the required rate of return on the stock, is 13.25% (rE = 13.25%). Based on this information and the fact that this is a constant growth stock, what should be the market price of this stock today (find P0). Assuming that everything remains constant (which therefore suggests that rE = 13.25% and g = 7% going forward), what do you expect this stock's price will be ten years from today (P10), or by the year 2031?
Today's Price (P0) =
Expected Price in 10 Years (P10 = P2031) =
Purchase A New Answer
Custom new solution created by our subject matter experts
GET A QUOTE
Answer Preview
Today price (Po) = $160
Expected price in 10 years (p10) =$336.768
Step-by-step explanation
D1 =$10
g(growth rate) =7% per year
Rate of return = 13.25%
As per constant growth stock/ model
Po=D1/Ke-g
=$10/13.25%-7%
=$10/6.25%
=$160
Price of stock is $160
Calculation of P10
Again using constant growth stock /model
P10 = D11/Ke-g
=$10(1+7%)11/13.25%-7%
=$10*2.1048/6.25%
=$21.048/6.25%
=$336.768
Expected price in 10 years is @336.768
