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SRS, Inc. just paid an annual dividend of $1.20 last month. The required return is 15 percent and...

Question:

SRS, Inc. just paid an annual dividend of {eq}\$1.20 {/eq} last month. The required return is {eq}15 \% {/eq} and the growth rate is {eq}3 \% {/eq}. What is the expected value of this stock ten years from now?

Present Value of Future Cash Flows:

The present value represents today's value of future payments that will be received on a periodic basis. In order to determine the present value, the information about the future cash flows of an investment, the discount rate of the investment and the time period for which the cash flows will be generated, are necessary.

Answer and Explanation:


Answer:

The expected value of SRC, Inc' s stock ten years from now is $13.84.

Explanation:

SRC, Inc. has shared the following data:

  • Last dividend, D0 = $1.20
  • Required return, Ke = 15%
  • Constant growth rate, g = 3%
  • Price in year 10, P10 =?

Computation:

The first step is to determine the current stock price, P0:

  • P0 = D0 * (1 + g) / (Ke - g)
  • P0 = $1.20 * (1 + 0.03) / (0.15 - 0.03)
  • P0 = $1.236 / 0.12
  • P0 = $10.30

The next step is to determine the stock price ten years from now, i,e P10:

  • P10 = {eq}P0 * (1 + g)^10 {/eq}
  • P10 = {eq}$10.30 * (1 + 0.03)^10 {/eq}
  • P10 = {eq}$10.30 * 1.3434 {/eq}
  • P10 = {eq}$13.84 {/eq}

Learn more about this topic:

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The Dividend Growth Model

from Finance 101: Principles of Finance

Chapter 14 / Lesson 3
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