Answer:
$47.61 per share
Explanation:
As we know that:
Current Price = Expected Dividend / (Required Return - Growth Rate)
Here
Expected Dividend is $1.98 <u>(Step1)</u>
Required Return is 11%
Growth Rate is 6.3%
By putting values, we have:
Current Price = $1.98 / (0.11 - 0.063)
Current Price = $42.13
The price of Stock in 2 years will be adjusted by growth rate:
Price of Stock in 2 years = Current Price * (1 + Growth Rate)^2
Here
Current Price of the stock is $42.13 per share
Growth rate = ROE * Plowback Ratio = 14% * 0.45 = 6.30%
By putting values, we have:
Price of Stock in 2 years = $42.13 * 1.063^2
Price of Stock in 2 years = $47.61 per share
So, you should expect the share to sell at $47.61 in 2 years
<u>Step 1: Find Expected Dividend</u>
Expected Dividend = Expected Earnings * Payout Ratio
Here
Expected Earnings is $3.6 per share
Payout Ratio = 1 - Plowback Ratio = 1 - 0.45 = 55%
By putting values in the above equation, we have:
Expected Dividend = $3.60 * 55%
Expected Dividend = $1.98 per Share
