Connolly Co.'s expected year-end dividend is D1 = $1.60, its required return is rs = 11.00%, its dividend yield is 6.00%, and its growth rate is expected to be constant in the future. What is Connolly's expected stock price in 7 years, i. e., what is? a. $37.52b. $39.40c. $41.37d. $43.44e. $45.61

Question

Blaine Ali

Business

24 February, 10:22

Connolly Co.'s expected year-end dividend is D1 = $1.60, its required return is rs = 11.00%, its dividend yield is 6.00%, and its growth rate is expected to be constant in the future. What is Connolly's expected stock price in 7 years, i. e., what is? a. $37.52b. $39.40c. $41.37d. $43.44e. $45.61

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Lacey Bauer · Answer 1

What is Connolly's expected stock price in 7 years, i. e., what is?

a. $37.52

Explanation:

Required rate of return it's equal to capital gains growths plus dividend yield

Then 11% = capital gains + 6%, so the capital gains it's equal to 5%.

First we need to find the stock price today with the information available about the value of the dividend:

P0 = Div / (r-g) = $1,6 / (0,11-0,05) = $26,67

This is the stock price today of the cash flow of dividend a growth rate of 5%

To know the price at the year 7, it's necessary to find the future value applying the growth rate of 5%.

P7 = P0 (1+r) ^7 = $26,67 * (1,05) ^7 = $37,52