Thus, because the dividend is paid out and reduces the price, we cannot simply take the future value in seven years of the stock price today because the price will fall by the amount of the second year, third year, etc. dividends. However, there's a simple way around this challenge; we can calculate P7 by examining the dividend growth at D8:
P7 = D8 / (r - g) = D0 * (1 + g)^8 / (r - g)
P7 = $1.56 * (1.08)^8 / (0.15 - 0.08) = $41.25
This eliminates the problem of the stock price falling by the amount of dividend paid out and also eliminates tedious computations of the dividends and their future values to subtract away from the $59.28 you got from excel.
Thus, the answer is $41.25.
What will be the Next Dividend 7 year's from now? At T0, it was 1.56. Seven year's from now the dividend will be 2.67. (FV of 1.56, R 8%, N 7). The Next Dividend, 7 years from now, will be 2.67 + 8%, or 2.8874. Stock price will be 2.8874 / .07 (15% - 8%), or 41.25
A boundaryOr stock value problem is a problem, typically an ordinary differential equation or a partial differential equation, which has values assigned on the physical boundary of the domain in which the problem is specified.
Well
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Multiple Choice:
Jefferson Mills just paid a dividend of $1.56 per share on its stock. The dividends are expected to grow at a constant rate of 8 percent per year, indefinitely. What will the price of this stock be in 7 years if investors require a 15 percent rate of return?
$28.18
$32.04
$37.46
$41.25
$43.33
I did: since it is constant growth, the text uses formula P=D1/(R-g), so $1.56/(.15-.08)=$22.29. From Excel, pv of $22.29 is: =pv(.15,7,,-22.29)=$59.28.
Anyone see what I did wrong?
