A stock just paid an annual dividend of $1.2. The dividend is expected to grow by 10%
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Question:
A stock just paid an annual dividend of $1.2. The dividend is expected to grow by 10% per year for the next 3 years. The growth rate of dividends will then fall steadily (linearly) from 10% after 3 years to 7% in year 6.
The required rate of return is 12%.
1What is the stock price if the dividend growth rate will stay0.07 (7%) forever after6 years?
2In 6 years, the P/E ratio is expected to be 24 and the payout ratio to be 80%. What is the stock price when using the P/E ratio?
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