Question

ABC Inc. just announced it is increasing its annual dividend to $1.00 next year and establishing a policy whereby the dividend will increase by 3.5 percent annually thereafter.
(1) What will the dividend be six years from now?
(2) How much will one share of this stock be worth 8 years from now if the required rate of return is 9 percent?

Answer 1

Answer:

Consider the following calculations.

Explanation:

(1)

Dividend six years from now = Dividend next year * (1 + growth rate) ^ 6

Dividend six years from now = $1.00 * (1 + 3.5%) ^ 6 = $1.23

(2)

Stock price 8 years from now = Dividend 9 years from now / ( Ke - g )

Dividend 9 years from now = = $1.00 * (1 + 3.5%) ^ 9 = $1.36

Stock price 8 years from now = $1.36 / ( 9% - 3.5% ) = $24.78