Question

The Nearside Co. just paid a dividend of $1.20 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 10 percent on the stock. a. What is the current price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. 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.) c. What will the price be in 10 years? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Answer and Explanation:

The computation is shown below:

a. Current price is

= D1 ÷ (Required return - Growth rate)

= ($1.20 × 1.04 ÷ (0.1 - 0.04)

= $20.8

b. Now the price in three year is

P3 = Current price × (1 + Growth Rate)^3

= $20.8 × (1.04)^3

= $23.40

c. For price in 10 year it is

P10 = Current price × (1 + Growth Rate)^10

= $20.80 × (1.04)^10

= $30.79

We simply applied the above formula