Question

Duff Inc. paid a 2.53 dollar dividend today. If the dividend is expected to grow at a constant 4 percent rate and the required rate of return is 7 percent, what would you expect Duff's stock price to be 2 years from now?

Answer 1

Answer: 94.85

Explanation: we can compute stock price after two years by computing stock price today and multiplying it by square of growth rate.

we know that,

`return\:on\:equity=\:(expected\:dividend)/(market\:price)+growth`

where,

expected dividend = current dividend (1+growth)

so, we can write the above equation as :-

`0.07\:=(2.53\left ( 1+0.04 \right ))/(P_0)+0.04`

solving this equation we get:-

`P_0= 87.70`

and price after two years:-

`P_2=87.70\left ( 1+0.04\right)^2`

`P_2=94.85`