Question

Gilmore, Inc., just paid a dividend of $3.05 per share on its stock. The dividends are expected to grow at a constant rate of 5.5 percent per year, indefinitely. Assume investors require a return of 10 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.).What will the price be in five years and in fourteen years?

Answer 1

Answer:

intrinsic value: 49.50

value in four years:        $   61.32

value in fourteen years: $ 104.75

Explanation:

we solve using the gordon model:

$\frac{divends_1}{return-growth} = Intrinsic \: Value$

D0 =  3.05

D1 = 3.05 x ( 1 + 0.055) = 3.21775‬

$\frac{3.21775}{0.12 - 0.055} = Intrinsic \: Value$

Value: 49.50384615

In the future will grow at the same rate as dividends:

price in four years:         49.50 x (1.055)^4  =  61.32182021

price in fourteen years: 49.50 x (1.055)^14 = 104.7465274