Question

The Napa Co. just paid a dividend of $3.15 per share on its stock. The dividends are expected to grow at a constant rate of 5 percent per year indefinitely. If investors require a return of 12 percent on the stock, what is the current price? What will the price be in four years?

Answer 1

The formula to calculate current price is given below:

Current price =- Last dividend x (1 + Growth) Required return - Growth

$Current\, price=\frac{3.15\times \left ( 1+0.05 \right )}{0.12-0.05}$

$Current\, price=\frac{3.3075}{0.07}$

Current price is $47.25.

The dividend in 5 years will be:

Dividend = 3.15 x (1 + 0.05)

$Dividend=3.15\times 1.276281563$

$Dividend=4.020286922$

Price in 4 years will be:

$Share\, price=\frac{4.020286922}{0.12-0.05}$