Question

Gilmore, Inc., just paid a dividend of $3.30 per share on its stock. The dividends are expected to grow at a constant rate of 4.5 percent per year, indefinitely. Assume investors require a return of 9 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 six years and in thirteen years? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Price Six years $ Thirteen years $

Answer 1

Answer:

(i) $76.63(Approx)

(ii) $99.80 (Approx) ; $135.81 (Approx)

Explanation:

Current price = Dividend for next period ÷ (Required return - Growth rate)

                      = (3.3 × 1.045) ÷ (0.09 - 0.045)

                     = $76.63(Approx)

Price in 6 years:

$=Current\ price\times(1+Growth\ rate)^{n}$

$=76.63\times(1+0.045)^{6}$

$=76.63\times(1.045)^{6}$

      = $99.80 (Approx)

Price in 13 years:

$=Current\ price\times(1+Growth\ rate)^{n}$

$=76.63\times(1+0.045)^{13}$

$=76.63\times(1.045)^{13}$

      = $135.81 (Approx)