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Week 7 - Assignme... Week Assignmei Week Assignme Week me 44 100% Week 6 - Assignment 2: Calculate Return on Equity (ROE) Instructions NCU ASC's current stock price is $24, and its last dividend was $1.89. NCU ASC has a very strong financial position so its required rate of return is 14%, and dividends are expected to grow at a constant nate in the future. Create an Excel workbook with two tabs in which you answer/solve the following (be sure to label tabs accordingly): 1. What is the constant growth rate of NCU ASO stock? 2. Given the growth rate in #1, what is NCU ASC's expected stock price in five years? Length: One Excel Workbook
Answer:
a) P = Do(1 + g) / (r - g)
Do = $1.89, r = 14%, P = $24
24 = 1.89(1 + g) / (0.14 - g)
3.36 - 24g = 1.89 + 1.89g
25.89g = 1.47
g = 0.0568 or 5.68%
Hence, growth rate = 5.68%
b) Expected stock price after 5 years = D6 / (r - g)
D6 = D0(1 + g)^6 = 1.89(1.0568)^6 = $2.63
Expected stock price after 5 years = 2.63 / (0.14 - 0.0568)
= $31.61
Hence, expected stock price in 5 years = $31.61
