Question

Fletcher Company's current stock price is $36, its last dividend was $2.40, and its required rate of return is 12%. If dividends are expected to grow at a constant rate, g, what is Fletcher's expected stock price 7 years from now? (Round your answer to the nearest hundredth, have two decimal digits after decimal place)

Answer 1

Price of Stock = PV of CFs from it.

P0 = D1 / [ Ke - g ]

P0 = Price Today

D1 = Expected Div

D0 = Last Paid Div

Ke = Required Ret

g = Growth Rate

D1 = D0 ( 1+ g )

Thus

36 = 2.40 ( 1 + g ) / [ 0.12 - g ]

4.32 - 36g = 2.40 + 2.40g

38.40g = 1.92

g = 1.92 / 38.40

= 0.05

Growth Rate is 0.05 i.e 5%

P7 = D8 / [ Ke - g ]

P7 = Price after 7 Years

D8 = Div after 8 Years

Ke = Required Ret

g = Growth Rate

D8 = D0 (1+g)^8

= $ 2.4 ( 1 + 0.05)^8

= $ 2.4 ( 1.05^8)

= $ 2.4 * 1.4775

= $ 3.5459

P7 = D8 / [ Ke - g ]

= $ 3.5459 / [ 12% - 5% ]

= $ 3.5459 / 7%

= $ 50.66

Pls comment, if any further assistance is required.