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Fletcher Company's current stock price is $36, its last dividend was $2
Fletcher Company's current stock price is $36, its last dividend was $2.40 (Do=2.40), and its required rate of return is 12%. If dividends are expected to grow at a constant rate, g, what is Fletcher's expected stock price 6 years from now? (Round your answer to the nearest hundredth, have two decimal digits after decimal place) Answer:
Expert Solution
As per Dividend Discount Model, Stock price P= D1/(r-g)
D1= Do*(1+g). Therefore, P= Do*(1+g)/(r-g)
Where Do= last dividend, D1= next year dividend, r= Required rate of return and g= constant growth rate.
Given,
P= 36, D0= 2.40, r= 12%
Substituting the variables and simplifying the equation,
36= 2.40*(1+g)/(0.12-g)
36= (2.40+2.40g)/(0.12-g)
2.40+2.40g = 4.32-36g
38.4g= 1.92
Growth rate (g)= 1.92/38.4 = 0.05 Or, 5%
Dividend in year 7 (D7)= D0*(1+g)^7
=2.40*(1+0.05)^7 = $3.377041
Stock price 6 years from now= D7/(r-g)
=$3.377041/(0.12-0.05) = $48.24
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