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Fowler, Inc., just paid a dividend of $2.55 per share on its stock. The dividends are expected to grow at a constant rate of 3.9 percent per year, indefinitely. If investors require a return of 10.4 percent on this stock, what is the current price? What will the price be in three years? In 15 years?

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Answer:

Use the Gordon Growth formula for this.

The price of a stock in the current year is:

= (Dividends in current year * (1 + growth rate) ) / (Required return - growth rate)

Current price

= (2.55 * ( 1 + 3.9%) ) / (10.4% - 3.9%)

= $40.76

In 3 years:

= (2.55 * ( 1 + 3.9%)⁴ ) / (10.4% - 3.9%)

= $45.72

In 15 years:

= (2.55 * ( 1 + 3.9%)¹⁶ ) / (10.4% - 3.9%)

= $72.36

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