Question

The Brennan Co. just paid a dividend of $2.50 per share on its stock. The dividends...

The Brennan Co. just paid a dividend of $2.50 per share on its stock. The dividends are expected to grow at a constant rate of 7% per year indefinitely. Brennan Co. investors require a 12% return on their stock.

a. What is the current price of a share of Brennan Co. Stock?

b. What will be the price of a share in of Brennan Co. Stock in 5 years?

c. What will be the price of a share of Brennan Co. Stock in 20 years?

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Answer #1

a. Current Stock Price = Expected Dividend / ( required Rate of Return - growth rate)

= ( $ 2.50 * 107%) / ( 12% -7%)

= $ 53.50

Hence the correct answer is $ 53.50

b. Price in 5 Years = Current Price * (1+ Growth Rate ) ^ 5

= $ 53.50 * ( 1+7/100) ^ 5

= $ 75.04

Hence the correct answer is $ 75.04

c.

Price in 20 Years = Current Price * (1+ Growth Rate ) ^20

= $ 53.50 * ( 1+7/100) ^ 20

= $ 207.03

Hence the correct answer is $ 207.03

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