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25 September, 15:25

Fowler, Inc., just paid a dividend of $3.05 per share on its stock. The dividends are expected to grow at a constant rate of 5.5 percent per year, indefinitely. Assume investors require a return of 10 percent on this stock.

What is the current price? What will the price be in five years? What will the price be in fourteen years?

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  1. 25 September, 15:49
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    a) P0 = D1 / (Ke - g)

    P0 = Current Price

    D1 = Expected Div after 1 Year

    Ke = COst of Equity

    g = Growth Rate

    D1 = D0 (1+g)

    = $ 3.05 (1+0.055)

    = $ 3.05 (1.055)

    = $ 3.21775

    P0 = D1 / (Ke - g)

    = $ 3.21775 / (0.10-0.055)

    = $ 3.21775 / 0.045

    = $ 71.5055

    Part B:

    P3 = D4 / (Ke - g)

    P3 = Price after 3 Years

    D4 = Expected Div after 4 Years

    Ke = COst of Equity

    g = Growth Rate

    D4 = D0 (1+g) ^4

    = $ 3.05 (1+0.055) ^4

    = $ 3.05 (1.055) ^4

    = $3.05 * 1.2388

    = $ 3.778

    P3 = D4 / (Ke - g)

    = $ 3.778 / (0.100-0.055)

    = $ 3.778 / 0.045

    = $ 83.964

    Part c:

    P15 = D16 / (Ke - g)

    P15 = Price after 15 Years

    D16 = Expected Div after 16 Years

    Ke = COst of Equity

    g = Growth Rate

    D16 = D0 (1+g) ^16

    = $ 3.05 (1+0.055) ^16

    = $ 3.05 * (1.055) ^16

    = $3.05 * 2.355

    = $ 7.183

    P15 = D16 / (Ke - g)

    = $ 7.183 / (0.100-0.055)

    = $ 7.183 / 0.045

    = $ 159.6344
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