Business Finance question on stock valuation?

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AML9020

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O'Leary Corporation's last dividend paid was $1.00. Dividends are expected to grow at a rate of 20% this year, 15% next year, 10% the following year, and 5% thereafter. The required rate of return is 15%. What is the price of the stock 5 years from now?
 
The answer is $17.6. Here's how you solve it. You're using Gordon's Dividend Discount Model, right? so in five years, starting at a dollar, at year 5, dividends will be $1.67. (if you can't figure this out, just drop the class right now).

so using Gordon's DDM, $1.67 x (1 + long term growth) / ( Rate of Return - long term growth); so LT growth = 5%. RoR = 15%, so

[$1.67 * (1.05)] / (.15 - .05) = $17.6.

If you've got multiple choice and $17.6 doesn't show as an answer, try just doing $1.67/.1, which would be $16.7.
 
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