Question

Covid Corp's stock is selling for $58.90 in today's market. Its dividend has been growing at 3.9% per year since the company first issued a dividend 11 years ago and is expected to continue growing at this rate forever. Investors have required a 12.77% return on this stock since it was founded and it is expected that this required rate of return will continue into the future. If Covid Corp's first dividend was $4.50, was is the best estimate of the market price of the stock 9 years from today

Answer 1

We have used the Gordon Growth Model to estimate the Stock Price

Attaching the calculations and formulas used :-

4.50 First Dividend (which was issued 11 years ago) No of Years Growth rate of Dividend Dividend issued for this year 3.90% 6.85 SECCO VOLAWN Expected Dividend after 9 years Required rate of return on Stock Growth Rate Hence, Expected Stock Price after 9 years 9.7 12.77% 3.90% 109.04

А B 4.5 COWN First Dividend (which was issued 11 years ago) No of Years Growth rate of Dividend Dividend issued for this year 0.039 =C3*((1+C5)^C4) Expected Dividend after 9 years Required rate of return on Stock Growth Rate Hence, Expected Stock Price after 9 years =C6*(1+C5)^9) 0.1277 0.039 =C8/C9-C10) 11

Hence, best estimate of Stock Price after 9 years = 109.04