Anton, Inc., just paid a dividend of $2.70 per share on its stock. The dividends

Question

Anton, Inc., just paid a dividend of $2.70 per share on its stock. The dividends are expected to grow at a constant rate of 4.5 percent per year, indefinitely. Assume investors require a return of 9 percent on this stock.

What is the current price?

What will the price be in six years and in thirteen years? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)

Anton, Inc., just paid a dividend of $2.70 per share on its stock. The dividends are expected to grow at a constant rate of 4.5 percent per year, indefinitely. Assume investors require a return of 9 percent on this stock.

Explanation / Answer

The constant dividend growth model is

A)

Pt = Dt * (1 + g) / (R – g)

So, the price of the stock today is: P0 = D0 (1 + g) / (R – g)

P0 = $2.70 (1.045) / (0.09 – .045)

P0 = $2.82 / 0.045 = $62.70

B)

P6 = D6 (1 + g) / (R – g)

P6 = D0 (1 + g)7 / (R – g)

P6 = $2.70 (1.045)7 / (0.09 – .045)

P6 = $3.67 / 0.045 = $81.55

P13 = D13 (1 + g) / (R – g)

P13 = D0 (1 + g)14 / (R – g)

P13 = $2.70 (1.045)14 / (0.09 – .045)

P6 = $5 / 0.045 = $111.11

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