Gilmore, Inc., just paid a dividend of $3.00 per share on its stock. The dividen

Question

Gilmore, Inc., just paid a dividend of $3.00 per share on its stock. The dividends are expected to grow at a constant rate of 5.25 percent per year, indefinitely. Assume investors require a return of 12 percent on this 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 four years and in sixteen years? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Explanation / Answer

The Constant Dividend Growth Model is

Pt =Dt(1+g)/(R-g)

so the price of stock todayis

P0=D0(1+g)/(R-g)

P0=3(1.0525)/(.12-.0525)

P0 = $46.78

The dividend at year 4 is the dividend today times the FVIF for the growth rate in dividends and four years, so

:P3=D3(1+g)/(R-g)

P3=D0(1+g)^4/(R-g)

P3= 3(1.0525)^4(0.12-0.0525)

P3=$54.54

We can do the same thing to find the dividend in year 16 which gives us the price in year 15

P15=D15(1+g)/(R-g)

P15=D0(1+g)^16/(R-g)

P15= 3(1+.0525)^16/(.12-.0525)

P15= $106.07

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