The Starr Co. just paid a dividend of $1.65 per share on its stock. The dividends are expected to grow at a constant rate of 5 percent per year, indefinitely. Investors require a return of 12 percent on the stock. What is the current price? (Do not round intermediate calculations and round your answer to 2 decimal places, e. g., 32.16.) What will the price be in three years? (Do not round intermediate calculations and round your answer to 2 decimal places, e. g., 32.16.) What will the price be in 14 years?

(a) $24.75

(b) $28.651

(c) $49

Explanation:

Given that,

Dividend paid recently = $1.65 per share

Growth rate of dividend, g = 5% per year

Return require, rr = 12 percent

(a) Current price:

= [Dividend paid * (1 + g) ] : (rr - g)

= [$1.65 * (1 + 0.05) ] : (0.12 - 0.05)

= $1.7325 : 0.07

= $24.75

(b) Price in three years:

= Current price * (1 + g) ^ (3)

= $24.75 * (1 + 0.05) ^ (3)

= $24.75 * (1.05) ^ (3)

= $24.75 * 1.157625

= $28.651

(c) Price in 14 years:

= Current price * (1 + g) ^ (14)

= $24.75 * (1 + 0.05) ^ (14)

= $24.75 * (1.05) ^ (14)

= $24.75 * 1.9799316

= $49