Question

A stock paid dividend of $2 at the end of the current year. Dividends will grow at the rate of 5% indefinitely. The required rate of return of the investor is q12%. calculate the price of the stock at the end of 2nd year

Answer 1

Answer:

Dividend at the end of Currentr Year(D0) = $2

Growth rate of dividend(g) = 5% indefinately

Required rate of Return(Ke) = 12%

Calculating the Price of Stock at the end of 2nd year:-

P2 = $33.075

So, Stock Price at the end of 2nd year is $33.075

Answer 2

Dividend at the end of Currentr Year(D0) = $2

Growth rate of dividend(g) = 5% indefinately

Required rate of Return(Ke) = 12%

Calculating the Price of Stock at the end of 2nd year:-

P_2 =\frac{D_0(1+g)^3}{(Ke-g)}

P_2 =\frac{2*(1+0.05)^3}{(0.12-0.05)}

P2 = $33.075

So, Stock Price at the end of 2nd year is $33.075

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