Question

Waters Corporation has a stock price of $20 a share. The stock's year-end dividend is expected to be $2 a share (D1 = $2.00). The stock's required rate of return is 15 percent and the stock's dividend is expected to grow at the same constant rate forever. What is the expected price of the stock seven years from now?

Answer 1

Answer: $28.14

Step-by-step explanation:

The following information can be gotten from the question:

Stock price(P) = $20

Dividend (D1) = $2

Required rate of return = 15% = 0.15

To calculate growth rate, we use:

P=D1/(k-g)

20=2/(0.15-g)

20(0.15-g) = 2

3 - 20g = 2

20g = 1

g = 1/20

g = 0.05 = 5%

To calculate the price after 7 years, this means we will have to find the dividend for the 8th year.

D8=D1(1+.05)^7

D8 = 2(1+0.5)^7

D8= 2.814

Then,

P7=D8/(K-G),

P7 = 2.814/(0.15 - 0.05)

P7 = 2.814/0.1

P7=28.14

The expected price of the stock seven years from now will be $28.14