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Fowler, Inc., just paid a dividend of $3.05 per share on its stock. The dividends are expected to grow at a constant rate of 5.5 percent per year, indefinitely. Assume investors require a return of 10 percent on this stock.

What is the current price?What will the price be in five years?What will the price be in fourteen years?

Respuesta :

abdullahfarooqi

Answer:

a) P0 = D1 / (Ke - g)

P0 = Current Price

D1 = Expected Div after 1 Year

Ke = COst of Equity

g = Growth Rate

D1 = D0(1+g)

= $ 3.05 (1+0.055)

= $ 3.05(1.055)

= $ 3.21775

P0 = D1 / (Ke - g)

= $ 3.21775 / (0.10-0.055)

= $ 3.21775 / 0.045

= $ 71.5055

Part B:

P3 = D4 / (Ke - g)

P3 = Price after 3 Years

D4 = Expected Div after 4 Years

Ke = COst of Equity

g = Growth Rate

D4 = D0(1+g)^4

= $ 3.05 (1+0.055)^4

= $ 3.05(1.055)^4

= $3.05 * 1.2388

= $ 3.778

P3 = D4 / (Ke - g)

= $ 3.778 / (0.100-0.055)

= $ 3.778 / 0.045

= $ 83.964

Part c:

P15 = D16 / (Ke - g)

P15 = Price after 15 Years

D16 = Expected Div after 16 Years

Ke = COst of Equity

g = Growth Rate

D16 = D0(1+g)^16

= $ 3.05 (1+0.055)^16

= $ 3.05 * (1.055)^16

= $3.05 * 2.355

= $ 7.183

P15 = D16 / (Ke - g)

= $ 7.183 / (0.100-0.055)

= $ 7.183 / 0.045

= $ 159.6344

Explanation:

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