14. Anderson, Inc. (AI) stock is expected to pay a dividend of $1.80 twelve year
ID: 2754005 • Letter: 1
Question
14. Anderson, Inc. (AI) stock is expected to pay a dividend of $1.80 twelve years from now, with no dividends to be paid until then. Dividends are forecasted to grow thereafter at a constant rate of 4%/yr. indefinitely. The appropriate required return for valuing this stock is 10%/yr. Calculate today’s price for AI stock.
15. Young Corp. (YC) stock is expected to pay a dividend of $2.20 ten years from now, with no dividends to be paid until then. Dividends are forecasted to grow thereafter at a constant rate of 3%/yr. indefinitely. The appropriate required return for valuing this stock is 14%/yr. Calculate what the stock price is expected to be two years from now for YC stock.
Explanation / Answer
14. Anderson, Inc. (AI) stock is expected to pay a dividend of $1.80 twelve years from now, with no dividends to be paid until then. Dividends are forecasted to grow thereafter at a constant rate of 4%/yr. indefinitely. The appropriate required return for valuing this stock is 10%/yr. Calculate today’s price for AI stock.
Solution 14: The todays expected stock price for AI stock=
P0 = D0 (1+g) / (R - g)
P2 = $1.80 (1+4%) / (10% - 4%)
= $1.80 * (1.04) / 6%
Today's Stock Price for AI stock = $31.20
15. Young Corp. (YC) stock is expected to pay a dividend of $2.20 ten years from now, with no dividends to be paid until then. Dividends are forecasted to grow thereafter at a constant rate of 3%/yr. indefinitely. The appropriate required return for valuing this stock is 14%/yr. Calculate what the stock price is expected to be two years from now for YC stock.
Solution 15: the stock price is expected to be two years from now for YC stock=
P2 = (D1 (1+g)2 ) / (R - g)
P2 = ($2.20 (1+3%)2 ) / (14% - 3%)
= $2.20 * (1.03)2 / 11%
Stock Price after two years = $21.22
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