I am expected to pay a dividend of $5.10 year for the next for years. If the current price of my stock is $31.67, and my equity cost of capital is 15% what price would I expect my stock to sell for at the end of four years?
To calculate the expected stock price at the end of four years, we can use the dividend discount model (DDM), which takes into account the dividends and the equity cost of capital.
The DDM formula is:
Stock Price = Dividend / (Rate of return - Dividend growth rate)
Let's break down the information given in the question:
Dividend (D) = $5.10 per year
Equity cost of capital (r) = 15% = 0.15
Now, we need to determine the dividend growth rate. Since there is no information given about the growth rate, we will assume it to be zero, which means the dividend amount remains constant over time.
Dividend growth rate (g) = 0
Next, we need to calculate the rate of return (required rate of return). In this case, the equity cost of capital (r) is the required rate of return.
Rate of return (r) = 15% = 0.15
Now we can substitute these values into the DDM formula:
Stock Price = $5.10 / (0.15 - 0) = $5.10 / 0.15 = $34
Therefore, based on the given information, you can expect the stock price to be around $34 at the end of four years.