A company will pay a $5 per share dividend in 1 year. The dividend in 2 years wi

Question

A company will pay a $5 per share dividend in 1 year. The dividend in 2 years will be $5 per share, and it is expected that dividends will grow at 6% per year thereafter. The expected rate of return on the stock is 12%.

a. What is the current price of the stock? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Current price $

b. What is the expected price of the stock in a year? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Expected price $

Explanation / Answer

1. Current Stock Price ke= D1/P0+g 12%= 5/P0 + 6% P0= 5/6% P0= $ 83.33-5 P0= $ 78.33 2. Stock Price after year 1 ke= D2/P1+g 12%= 5/P1 + 6% P1= 5/6% P1= $ 83.33 Price after year 1 = $ 83.33

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