What should be the stock value one year from today for a stock that currently sells for $35, has a required return of 15%, an expected dividend of $2.80, and a constant dividend growth rate of 7%

Question

Business

Jade Velasquez

25 March, 04:19

What should be the stock value one year from today for a stock that currently sells for $35, has a required return of 15%, an expected dividend of $2.80, and a constant dividend growth rate of 7%

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Answers (1)

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Lailah Powers · Answer 1

The price of the stock one year from today is $37.45

Explanation:

The expected dividend that is the dividend for the next period of D1 is given as 2.8. To calculate the value of the stock one year from now, we need to use D2 in our calculations.

The formula to find the price of a stock that has a constant dividend growth is,

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

This is to calculate the pricce of the stock today. To calculate the price of the stock one year from today, we need to use D2 in our calculations.

Where, D2 = D1 * (1+g)

Thus, the price of the stock one year from today or P1 is

P1 = 2.8 * (1+0.07) / 0.15 - 0.07 = $37.45