The Nearside Co. just paid a dividend of $1.20 per share on its stock. The dividends are expected to grow at a constant rate of 4 percent per year, indefinitely. Investors require a return of 10 percent on the stock. a. What is the current price? (Do not round intermediate calculations and round your answer to 2 decimal places, e. g., 32.16.) b. What will the price be in three years? (Do not round intermediate calculations and round your answer to 2 decimal places, e. g., 32.16.) c. What will the price be in 10 years? (Do not round intermediate calculations and round your answer to 2 decimal places, e. g., 32.16.)

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Business

Emilia

6 September, 08:46

The Nearside Co. just paid a dividend of $1.20 per share on its stock. The dividends are expected to grow at a constant rate of 4 percent per year, indefinitely. Investors require a return of 10 percent on the stock. a. What is the current price? (Do not round intermediate calculations and round your answer to 2 decimal places, e. g., 32.16.) b. What will the price be in three years? (Do not round intermediate calculations and round your answer to 2 decimal places, e. g., 32.16.) c. What will the price be in 10 years? (Do not round intermediate calculations and round your answer to 2 decimal places, e. g., 32.16.)

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Answers (1)

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Skyla Peck · Answer 1

Answer and Explanation:

The computation is shown below:

a. Current price is

= D1 : (Required return - Growth rate)

= ($1.20 * 1.04 : (0.1 - 0.04)

= $20.8

b. Now the price in three year is

P3 = Current price * (1 + Growth Rate) ^3

= $20.8 * (1.04) ^3

= $23.40

c. For price in 10 year it is

P10 = Current price * (1 + Growth Rate) ^10

= $20.80 * (1.04) ^10

= $30.79

We simply applied the above formula