The Starr Co. just paid a dividend of $1.65 per share on its stock. The dividend

Question

The Starr Co. just paid a dividend of $1.65 per share on its stock. The dividends are expected to grow at a constant rate of 5 percent per year, indefinitely. Investors require a return of 12 percent on the stock. What is the current price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) What will the price be in three years? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) What will the price be in 14 years? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Explanation / Answer

Solution.

A. Current price .

Formula = Dividend / Required rate of return

= $1.65 / 12% = $13.75

B. Price will be in three year.

Formula = Dividend / Required rate of return.

= $2.01 / 12% = $16.75

C. Price will be in14 year.

Formula = Dividend / Required rate of return.

= $3.43 / 12% = $28.58

Year Dividend Growth rate Growth Final dividend Current                     1.65 5%                      0.08                         1.73 1                     1.73 5%                      0.09                         1.82 2                     1.82 5%                      0.09                         1.91 3                     1.91 5%                      0.10                         2.01

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