The Starr Co. just paid a dividend of $2.00 per share on its stock. The dividend

Question

The Starr Co. just paid a dividend of $2.00 per share on its stock. The dividends are expected to grow at a constant rate of 4 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.)

Current price $

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.)

Stock price $

What will the price be in 12 years? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Stock price $

Explanation / Answer

1)Calculation of current price of stock: D1= D0(1+growth)= 2(1+0.04)= $2.08 Growth= 4% Required return= 12% Price= D1/(required return-growth)           = 2.08/(0.12-0.04)= 2.04/0.08= $26 Current price is $26 2)Calculation of price in three years: Price in three years= current price*(1+growth)^3                                        =26*(1+0.04)^3                                        = 26*1.124864= 29.25 Price in three years= $29.25 3)Calculation of price in 12 years: Price in 12 years= current price*(1+growth)^12                                        =26*(1+0.04)^12                                        = 26*1.601032= $41.63 Price in 12 years= $41.63

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