You are thinking about buying a share of Glencoe Industries, which has a current

Question

You are thinking about buying a share of Glencoe Industries, which has a current market price of $30.00 per share. Glencoe expects to pay a dividend of $1.125 per share next year. Your required rate of return on these types of investments s 6% and is expected to remain at that rate indefinitely. If dividends are expected to grow at a constant rate for the foreseeable future, what is the expected market price per share in 4 years? (Note: use four decimal places for all calculations)

Explanation / Answer

As per the question(Given),

Current Market price = $ 30.00

Dividend per share = $ 1.125 per share

Required rate of return = 6%

years = 4 years

Computation of expected market price per share in 4 years of Glencoe Industries. We have,

Step1; Computation of growth rate in the Current year of share of Glencoe's Industries.We get,

The Formula is

Current Market price = Expected Dividend per share / ( Required rate of return - growth rate)

Putting the values in the formula,We have,

30 = 1.125 /(0.06 - g)

0.06 - g = 0.0375

g = 0.0225 share is 2.25%.

Step2: Computation of expected market price after 4 years.We have,

   Expected market price = Current Market price x (1+g)n

   Expected market price = 30.00 x (1+ 0.0225)4 = 30.00 ( 1.0225)4

Expected Market price = $ 32.7925

   Hence, the expected market price is $ 32.7925 after 4 years.

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