Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Suppose D0=1 and D1=$1.05 and it is expected that earnings and dividends will grow at a constant rate of 5.00% per year and that the

image text in transcribed Suppose D0=1 and D1=$1.05 and it is expected that earnings and dividends will grow at a constant rate of 5.00% per year and that the stock's price will grow at this same rate. Let us assume that the stock is fairly priced and the required rate of return is 9.00%. When the growth rate is years from today P0(1+rs)4P1(1+g)4rsgD1P0(1+g)4 the required rate of return, you can use the following formula to calculate the price of the stock 4 And the price of the stock 4 years from today is Step 3: Practice: Constant Growth Valuation Now it's time for you to practice what you've learned. Suppose that a stock is expected to pay a dividend of $4.25 at the end of this year and it is expected to grow at a constant rate of 5.00% a year. If it is required return is 9.00%. What is the stock's expected price 4 years from today? $101.19 $106.25 $129.15 $149.98

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Risk Sensitive Investment Management

Authors: Mark H A Davis, Sébastien Lleo

1st Edition

9814578037, 978-9814578035

More Books

Students also viewed these Finance questions

Question

=+ (b) Show that 10(1)- . Pn(x) 2 + - 9(x) 12 log 2

Answered: 1 week ago