The Starr Co. just paid a dividend of $1.60 per share on its stock. The dividend

Question

The Starr Co. just paid a dividend of $1.60 per share on its stock. The dividends are expected to grow at a constant rate of 6 percent per year, indefinitely. Investors require a return of 10 percent on the stock. What is the current price? (Do not round intermediate calculations and round your final 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 final answer to 2 decimal places. (e.g., 32.16)) Stock price $ What will the price be in 12 years? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Explanation / Answer

According to contsant dividend growth model

Ke = D1/P0 +g

D0 = 1.6; D1 = 1.6*1.06 = 1.696

Ke =0.10

g=0.06

Hence 0.10 = 1.696/P0 + 0.06

Hence P0 = current price = $42.4

Price 3 years from now = 42.4*1.10^3 = $56.43

Price 12 years from now = 42.4*1.10^12 = $133.07

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