Question

Harry Corporation's common stock currently sells for $180 per share. Harry just paid a dividend of $10.18 and dividends are expected to grow at a constant rate of 6 percent forever. If the required rate of return is 12 percent, what will Harry Corporation's stock sell for one year from now?

Answer 1

Answer:

$190.64

Explanation:

Data provided in the question:

Current selling price of shares = $180 per share

Dividend paid = $10.18

Expected growth rate, g = 6% = 0.06

Required rate of return, r = 12% = 0.12

Now,

The dividend for the following year to the next year, D1 = $10.18 × (1 + g)ⁿ

here, n = 2 ( i.e the duration of next year and the following year )

thus,

D1 = $10.18 × (1 + 0.06)²

or

D1 = $11.438

Therefore,

Price of stock one year from now = $\frac{\textup{D1}}{\textup{(r-g)}}$

= $\frac{\textup{11.438}}{\textup{0.12-0.06}}$

= 190.637 ≈ $190.64