Question

Fowler, Inc., just paid a dividend of $2.40 per share on its stock. The dividends are expected to grow at a constant rate of 6.25 percent per year, indefinitely. Assume investors require a return of 12 percent on this stock. a. What is the current price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What will the price be in four years and in sixteen years? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Answer 1

Answer:

Po = 44.35

P4 = 56.52

P16 = 116.99

Explanation:

given data

dividend = $2.40 per share

constant rate = 6.25 percent per year

return = 12 percent

to find out

What is the current price and price be in four years and in sixteen years

solution

we will use here Gordon Growth Model

Po = $\frac{D1}{Ke -g}$        ..........................1

here Po is Current share price and Ke = Cost of equity and g is Growth rate in dividend

and D1 is Next year expected dividend i.e = 2.4 × 1.0625 = 2.55

so

Po = $\frac{2.55}{0.12 - 0.0625}$  

Po = 44.35

and

P4 = $\frac{D5}{Ke -g}$

P4 = $\frac{2.4*1.0625^5}{0.12 - 0.0625}$

P4 = 56.52

and

P16 =  $\frac{D17}{Ke -g}$

P16 = $\frac{2.4*1.0625^{17}}{0.12 - 0.0625}$

P16 = 116.99