# Price and dividend of a stock: calculate expected dividend and price

You are evaluating the price of a firm's stock. Yesterday, the firm paid $1 a share dividend. You expect the firms earnings and its dividend to grow 5% annual rate. The risk free rate of interest is 2%. The required rate of return for this firm's stock is 9%.

What do you expect the dividend to equal in three years?

What would be the most you would pay for this stock if you planned to hold it for 3 years? What about holding it for ten years?

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#### Solution Preview

See attached Excel.

Do = 1,

g = 5%

Rf = 2%

Rr = 9%

dividend in three years will grow to:

D3 = Do * (1+g)^3 = 1 * (1+5%)^3 = $1.16

If the stock is held for 3 years, we should use the DDM model.

The dividend at the end of 4 years is

D4 = ...

#### Solution Summary

The solution shows all the calculations needed to understand and arrive at the correct responses for dividend and price of a firm's stock.