a stock is expected to pay a dividend of $0.50 the end of the yeat and it should continue to grow at a constant rate of 5% a year. If the required return is 14% what is the stock expected price 5 years from today
To find the expected price of the stock 5 years from today, we can use the Gordon growth model, also known as the dividend discount model. According to this model, the price of a stock is equal to the present value of all its future dividends.
The formula for the Gordon growth model is:
P = D / (r - g)
Where:
P = Stock price
D = Dividend expected to be received at the end of the year (in this case, $0.50)
r = Required rate of return (in this case, 14% or 0.14)
g = Growth rate of dividends (in this case, 5% or 0.05)
Now, let's plug in the values into the formula and calculate the stock price:
P = $0.50 / (0.14 - 0.05)
P = $0.50 / 0.09
P ≈ $5.56
Therefore, the stock is expected to have a price of approximately $5.56, five years from today.