Boeing has a current price per share of $141.63, a dividend per share of $3.64,

Question

Boeing has a current price per share of $141.63, a dividend per share of $3.64, earnings per share of $8 and the expectation that next years earnings will be $8.50 per share. if the percentage change in the earnings per share is a proxy for th expected growth rate, what is the expected price of the stock next year using the dividend discounts model? Boeing has a current price per share of $141.63, a dividend per share of $3.64, earnings per share of $8 and the expectation that next years earnings will be $8.50 per share. if the percentage change in the earnings per share is a proxy for th expected growth rate, what is the expected price of the stock next year using the dividend discounts model? Boeing has a current price per share of $141.63, a dividend per share of $3.64, earnings per share of $8 and the expectation that next years earnings will be $8.50 per share. if the percentage change in the earnings per share is a proxy for th expected growth rate, what is the expected price of the stock next year using the dividend discounts model?

Explanation / Answer

Under dividend discount model the current price of the share is the present value of the future dividends. For discounting the future dividends we need discount rate which is nothing but Cost of Equity(Ke). There are many ways to calculate Ke but here I am finding the Ke using Dividend Growth Model.
According to dividend growth model, Ke = (D1/P0) + g , where D1 = Next year DPS, P0 = Current year price, g = growth

Growth = (8.5 - 8.0) / 8.0 = 6.25%

D1 = 3.64 x 106.25 = $3.87

Ke = (3.87 / 141.63) + 0.0625 = 0.0898 or 8.98%

Now, we can find out the value of next year's stock price using Dividend discount model.

Next year stock price = D1 / (Ke - g)

Next year stock price = 3.87 / (0.0898 - 0.0625) = $141.76

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