Question

Duff Inc. paid a 2.69 dollar dividend today. If the dividend is expected to grow at a constant 3 percent rate and the required rate of return is 5 percent, what would you expect Duff's stock price to be 4 years from now?

Answer 1

Answer:

$155.92

Explanation:

Div₀ = $2.69

Div₁ = $2.7707

Div₂ = $2.8538

Div₃ = $2.9394

Div₄ = $3.0276

Div₅ = $3.1184

we need to calculate the stocks terminal value in year 4, and to do that we will use Div₅ and the growing perpetuity formula:

stock price = $3.1184 / (5% - 3%) = $155.92

if we wanted to calculate the current stock price we would use Div₁ in the same formula.