Patience, Inc., just paid a dividend of $2.70 per share on its stock. The divide
ID: 2632415 • Letter: P
Question
Patience, Inc., just paid a dividend of $2.70 per share on its stock. The dividends are expected to grow at a constant rate of 5.00 percent per year, indefinitely. Assume investors require an 10.25 percent return on this stock.
What is the current price? (Select rounded answers as directed, but do not use the rounded numbers in intermediate calculations.)
What will the price be in 4 years? (Select rounded answers as directed, but do not use the rounded numbers in intermediate calculations.)
What will the price be in 14 years? (Select rounded answers as directed, but do not use the rounded numbers in intermediate calculations.)
rev: 02_24_2012
Patience, Inc., just paid a dividend of $2.70 per share on its stock. The dividends are expected to grow at a constant rate of 5.00 percent per year, indefinitely. Assume investors require an 10.25 percent return on this stock.
Explanation / Answer
Hi,
Please find the detailed answer as follows;
Part A:
Current Stock Price = D1/(ke - g) = 2.70*(1+.05)/(.1025 - .05) = $54
Option E ($54) is the correct answer.
-----
Part B:
Price in 4 Years = Current Stock Price*(1+Growth Rate)^4 = 54*(1+.05)^4 = $65.64
Option B ($65.64) is the correct answer.
------
Part C:
Price in 14 Years = Current Stock Price*(1+Growth Rate)^14 = 54*(1+.05)^14 = $106.92
Option E ($106.92) is the correct answer.