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8) River City Recycling just paid its annual dividend of $1.15 per share. The required return is 12.3 percent and the dividend growth rate is 0.75 percent. What is the expected value of this stock five years from now

Respuesta :

Shahzaibfaraz

Answer:

P5 = $10.41324736 rounded off to $10.41

Explanation:

Using the constant growth model of dividend discount model, we can calculate the price of the stock today. The DDM values a stock based on the present value of the expected future dividends from the stock. The formula for price today under this model is,

P0 = D0 * (1+g) / (r - g)    or   D1 / (1+g)

Where,

  • D0 is dividend today
  • D0 * (1+g) is the dividend for the next period or D1
  • g is the growth rate
  • r is the required rate of return

To calculate the price of the stock today, we use D1. Similarly, to calculate the price of the stock five years from now or P5, we will use D6.

D6 = D0 * (1+g)^6

D6 = 1.15 * (1+0.0075)^6

D6 = $1.20273007

P5 = 1.20273007  /  (0.123 - 0.0075)

P5 = $10.41324736 rounded off to $10.41

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