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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

VALUATION Of A CONSTANT GROWTH STOCK A stock is expected to pay a dividend of $0.50 at the end of the year (that is, D1 = 0.50). and it should continue to grow at a constant rate of 7% a year. If its required return is 12%. what is the stock’s expected price 4 years from today?

Summary Introduction

To determine: The expected price of stock after 4 years from today.

Expected Stock Price:

The estimated future price of a stock that is determined based on the income, it generates over the period is called expected stock price.

Explanation

Compute next year expected price ( P1).

Given,

Current stock price ( P0) is $10 (working note).

Growth rate (g) is 7% or 0.07.

The formula to compute expected price,

P4=P0(1+g)n

Where,

  • P0 is the current stock price.
  • g is the growth rate.
  • P4 is the stock price after 4 years.
  • n is number of years.

Substitute $10 for P0, 0.07 for g and 4 for n.

P1=$10(1+0.07)4=$10×1.3107=$13.10

Thus the stock price after 4 years is $13.1.

Working note:

Calculate current price of the stock

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