McNally Motors: Expected Future Stock Price
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McNally Motors has yet to pay a dividend on its common stock. However, the company expects to pay a $1.00 dividend starting two years from now (i.e., D2 = $1.00). Thereafter, the stock's dividend is expected to grow at a constant rate of 5 percent a year. The stock's beta is 1.4, the risk-free rate is kRF = 0.06, and the expected market return is kM = 0.12.
What is the stock's expected price four years from now?
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The solution presents the calculations and clearly explains how the answer is derived.
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At the end of one year the expected payout is = kRF + Beta(kM - kRF).
So, substituting the figures we have Expected payout at the end of first year = 0.06 + 1.4(0.12 -0.06) = 0.144. That is if the stock had a par value of 1.00$ it would be worth ...
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