The Starr Co. just paid a dividend of $1.25 per share on its stock. The dividend
ID: 2781782 • Letter: T
Question
The Starr Co. just paid a dividend of $1.25 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.)
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 8 years? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Stock price $
Explanation / Answer
note: as per dividend growth model:
a.current price = D0(1+g) / (k-g)
where,
D0 is the current dividend.=>$1.25
g is the growth rate=>5%=>0.05
k is the required rate.=>12%=>0.12.
current price = $1.25 * (1+0.05) / (0.12-0.05)
=>$1.25 /0.07
=>$18.75.
b. price in three years
=> D4 / (k-g)
D4 = D0(1+g)^4
=>$1.25*(1.05)^4=>$1.5193828125.
Price after three years = $1.5193828125 / (0.12-0.05)
=>$21.71...(two decimals)
c. Price in 8 years = D9 / (k-g)
=>D9 = D0*(1+g)^9
=>$1.25*(1.05)^9
=>$1.25*(1.55132821596)
=>$1.93916026995
price after 8 years = $1.93916026995 / (0.12 -0.05)
=>$27.70....(two decimals)..
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