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Williams Inc. is expected to pay a $5 dividend next year and that dividend is expected to grow at 2.5% every year thereafter. If the discount rate is 11.6%, what would be the present value of the expected dividend stream (aka the expected price of the firm's stock)? g

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Answer:

Expected dividend (D1) = $5

Cost of equity (Ke) = 11.6% = 0.116

Growth rate (g) = 2.5% = 0.025

Po = D1  

       Ke - g

Po = $5

        0.116 - 0.025

Po = $5

        0.091

Po = $54.95

Explanation:

The current market price of the stock is a function of expected dividend divided by the difference between expected return and growth rate.

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