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Bizhelp, Accountant
Category: Business and Finance Homework
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A stock is expected to pay a dividend of \$0.50 at the end of year

Resolved Question:

9-11. A stock is expected to pay a dividend of \$0.50 at the end of the year (that is, D1 = 0.50), and it should continue to grow at a constant rate of 7% a year. If it is required return of 12%, what is the stock’s expected price 4 years from today?
Submitted: 4 years ago.
Category: Business and Finance Homework
Expert:  Bizhelp replied 4 years ago.
Hi,

Thanks for your question.

The price today, P0 = D1 / (r-g) =0.50 / (0.12-0.07) = \$10, so in 4 years, since this is a constant growth stock, its price will be: P4 = P0 x (1.07)4 = \$10 x (1.07)4 = \$13.11.

Hope this helps!
Bizhelp, Accountant
Satisfied Customers: 5836
Experience: BA degree and Certified Public Accountant

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