Question

please be thorough with the explanation.

1. Stock Values The Starr Co. just paid a dividend of $1.95 per share on its stock. The dividends are expected to grow at a constant rate of 4.5 percent per year, indefinitely. If investors require a return of 11 percent on the stock, what is the current price? What will the price be in three years? In 15 years?

Answer 1

price of the stock using growth model:

dividend*(1+ growth rate) / (required rate - growth)

=>1.95*(1+0.045) / (0.11-0.045)

=>$31.35.

current price = 31.35.

price in three years = current price *(1+ growth rate)^number of years

=>31.35*(1.045)^3

=>$35.78.

price in fifteen years = $31.35*(1.045)^15

=>$60.67.