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Courageous, Inc. just paid a dividend of $1.80per share on its stock. The dividends are expected to grow at a constant rate of 3 percent per year, indefinitely. If investors require a 12 percent return on Courageous stock, what is the current price? What will the price be in 3 years? In 15 years?
PART A:
Current Price: $____________.
PART B:
Price in Three Years: $____________.
PART C:
Price in Fifteen Years: $____________.

Respuesta :

Shahzaibfaraz

Answer:

P0 = $20.6

P3 = $22.5101762 rounded off to $22.51

P15 = $32.09412 rounded off to $32.09

Explanation:

Using the constant growth model of dividend discount model, we can calculate the price of the stock today. The DDM values a stock based on the present value of the expected future dividends from the stock. The formula for price today under this model is,

P0 = D0 * (1+g) / (r - g)

Where,

  • D0 * (1+g) is dividend expected for the next period /year
  • g is the growth rate
  • r is the required rate of return or cost of equity

Current Price

P0 = 1.8 * (1+0.03)  /  (0.12 - 0.03)

P0 = $20.6

Price in three years

To calculate the current price of P0 we use the dividend for Year 1 or D1. Similarly, to calculate the price in three years or P3, we will use D4.

P3 = 1.8 * (1+0.03)^4  /  (0.12 - 0.03)

P3 = $22.5101762 rounded off to $22.51

Price in fifteen years

We will use D16.

P15 = 1.8 * (1+0.03)^16 / (0.12 - 0.03)

P15 = $32.09412 rounded off to $32.09

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