Question

Santa Klaus Toys just paid a dividend of $2.50 per share. The required return is 10.2 percent and the perpetual dividend growth rate is 3.4 percent. What price should this stock sell for five years from today?

Answer 1

Price of stock 5 years from now should be   $ 61.78

Step-1:Current price of bond
Current price of bond	=	D0*(1+g)/(Ke-g)			Where,
	=	2.50*(1+0.034)/(0.1020-0.034)			D0	=	$       2.50
	=	$    38.01			g	=	3.40%
					Ke	=	10.20%
Step-2:Price of bond 5 years from now
Price of bond 5 years from now	=	P0*(1+Ke)^n			Where,
	=	38.01*(1+0.1020)^5			P0	=	$    38.01
	=	$    61.78			Ke	=	10.20%
					n	=	5