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Stock Price for Non-constant Growth

A company will pay a $2 per share dividend in 1 year. The dividend in 2 years will be $4 per share, and it is expected that dividends will grow at 5 percent per year thereafter. The expected rate of return on the stock is 12 percent.

a. What is the current price of the stock?
b. What is the expected price of the stock in a year?
c. Show that the expected return, 12 percent, equals dividend yield plus capital appreciation.

Solution Preview

A company will pay a $2 per share dividend in 1 year. The dividend in 2 years will be $4 per share, and it is expected that dividends will grow at 5 percent per year thereafter. The expected rate of return on the stock is 12 percent.

a. What is the current price of the stock?
b. What is the expected price of the stock in a year?
c. Show that the expected return, 12 percent, equals dividend yield plus capital ...

Solution Summary

The solution calculates stock price for non-constant growth in dividends and shows that the expected return equals dividend yield plus capital appreciation.

$2.19