Question

IBM’s current stock price is $134, and its last dividend was $6.70. In view of IBM’s strong financial position and its consequent low risk, its required rate of return is only 11 percent. If dividends are expected to grow at a constant rate, g, in the future, and if rs is expected to remain at 11 percent, what is IBM’s expected stock price five years from now?

Answer 1

Current Dividend	$         6.70
Rate of return	11.00%
Growth Rate	g
Share price	$     134.00
With the given information, first, we should calculate the growth rate and then we can proceed to assess
the position 5 years after.
Share Price	=Current Dividend*(1+Growth rate)/(Rate of return-Growth Rate)
134	=6.7*(1+g)/(0.11-g)
(1+g)/(0.11-g)=	134/6.7
(1+g)/(0.11-g)=	$       20.00
(1+g)=	20*(0.11-g)
(1+g)=	20*0.11- 20*g)
(1+g)=	20*0.11- 20*g)
1+g=	2.2 - 20*g
g+20 g=	2.2-1
21*g=	1.2
g=	1.2/21
g=	5.71%
Dividend after 5 years	6.70*(1+5.71%)^5
Dividend after 5 years	$         8.85
Share price after 5 years=	=Current Dividend*(1+Growth rate)/(Rate of return-Growth Rate)
Share price after 5 years=	=8.85*(1+5.71%)/(11%-5.71%)
Share price after 5 years=	$     177.00