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Sky High Co. just paid a dividend of $4.9 per share on its stock (D0). The dividends are expected to grow at a constant rate of 2 percent per year indefinitely. If investors require an 14.9 percent return on Sky High Co. stock, the stock price in 5 years should be $ _________ . Round it to two decimal places, and do not include the $ sign, e.g., 23.56.

Respuesta :

Shahzaibfaraz

Answer:

P5 = 42.77671205 rounded off to 42.78

Explanation:

The constant growth model of the DDM will be used to calculate the price of the stock. The DDM values a stock based on the present value of the expected future dividends from the stock. The formula for price today under this model is,

P0 = D0 * (1+g) / (r - g)

Where,

  • g is the constant growth rate
  • D0 is the dividend paid today or most recently
  • r is the required rate of return

As we use D0 * (1+g) or D1 to calculate the value of the stock today (P0), we will use D6 to calculate the value of the stock 5 years from now.

D6 = 4.9 * (1+0.02)^6

D6 = $5.518195854

P5 = 5.518195854 / (0.149 - 0.02)

P5 = $42.77671205 rounded off to $42.78

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