Answer:
a). The current value of this stock=$30.29
b). The price of the stock in year 5=$66.84
Explanation:
a). Current value of stock
Use the expression for calculating the required rate of return to solve for the current value of stock as follows:
RRR=(EDP/SP)+DGW
where;
RRR=required rate of return
EDP=expected dividend payment
SP=share price
DGW=dividend growth rate
In our case:
RRR=17.15%=17.15/100=0.1715
EDP=$2.65
SP=unknown
DGW=8.4%=8.4/100=0.084
replacing in the original expression;
0.1715=(2.65/SP)+0.084
2.65/SP=0.1715-0.084
2.65/SP=0.0875
SP=2.65/0.0875=30.28571
The share price of the stock=$30.29
The current value of this stock=$30.29
b). Future value of stock
The future value of stock can be expressed as;
Future value={(required rate of return+1)^number of years}×current stock price
where;
required rate of return=17.15%=17.15/100=0.1715
number of years=5
current stock price=$30.29
replacing;
30.29×{(0.1715+1)^5)}
30.29×{1.1715^5}
The price of the stock in year 5=$66.84
