The Starr Co. just paid a dividend of $1.95 per share on its stock. The dividend
ID: 2741678 • Letter: T
Question
The Starr Co. just paid a dividend of $1.95 per share on its stock. The dividends are expected to grow at a constant rate of 3 percent per year, indefinitely. Investors require a return of 11 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.) Current price $ 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.) Stock price $ What will the price be in 6 years? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Stock price $
Explanation / Answer
1) Calculation of current stock price :
D0 = $1.95
Growth rate = 3%
Rate of return = 11%
Current stock price = (D0 *(1+ Growth rate)) / (Required rate of return - Growth rate)
= (1.95*1.03) / (0.11 - 0.03)
= 2.0085/0.08
= $25.11
2) Calculation of price in 3 years :
D3 = 1.95*1.03*1.03*1.03
= $2.131
P3 = D3*(1+Growth rate) / Required rate of return - Growth rate
= (2.131 * 1.03) / (0.11 - 0.03)
= 2.19493 / 0.08
= $27.44
3) Calculatio of price will be in 6years :
D6 = 1.95*1.03*1.03*1.03*1.03*1.03*1.03
= $2.3284
P6 = D6*(1+Growth rate) / Required rate of return - Growth rate
P6 = (2.3284*1.03) / 0.08
= $29.11
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