Question

Santa Klaus Toys just paid a dividend of $3.10 per share. The required return is 9.2 percent and the perpetual dividend growth rate is 4.0 percent. What price should this stock sell for five years from today?

Answer 1

Five years form today the stock will sell for $75.38

Step-by-step explanation:

Given D0 $3.10, r 9.2%, g 4.0%

Stock price? 5 years from today

The DDM will be used as it derives the stock price by discounting future dividends at the required return .

Need to discount future dividends to year five to find stock price

Find D6

3.10*(1.04)^6 =$3.92

DDM formula : Sp = D1/ r - g

= 3.92/0.092-0.04

=$75.38

Answer 2

The price of the stock 5 years from today will be $75.43

Step-by-step explanation:

The perpetual dividend growth means that the stock's dividends will grow at a constant rate forever. For such a stock, we use the constant growth model of DDM. The formula for price today using the constant growth model is:

P0 = D1 / r - g

Where D1 is the dividend in the next period or Year 1 or D0 * (1+g).

To calculate the price of the stock 5 years from now, we will use D6.

The price of the stock 5 years from now is:

P = 3.1 * (1+0.04)^6 / 0.092 - 0.04

P = $75.432 rounded off to $75.43