Mariota Corp. just paid a dividend of $3.60 per share on its stock. The dividend growth rate is expected to be 3.9 forever and investors require a return of 12.2 percent on this stock. What will the stock price be in 14 years?

Question

Business

Eli Shaw

11 December, 01:51

Mariota Corp. just paid a dividend of $3.60 per share on its stock. The dividend growth rate is expected to be 3.9 forever and investors require a return of 12.2 percent on this stock. What will the stock price be in 14 years?

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Answers (1)

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Jordan Griffin · Answer 1

The price of the stock will be $76.994

Explanation:

Out of the several DDM approaches, the constant growth model can be used to calculate the price of the stock based on the expected divdends that are growing at a constant rate. To calculate the price today, we take D1 that is the dividend expected for the next year/period. Thus, to calculate the price of the stock in 14 years, we need the dividend that is expected in year 15 or D15.

The price of the stock using this model in 14 years will be,

P = 3.6 * (1+0.039) ^15 / (0.122 - 0.039)

P = $76.994