You are considering buying shares of stock in the steel mill.

You are considering buying shares of stock in the steel mill. The forecast for the firm is steady growth over the next decade. The firm just paid its annual dividend of $1.42 per share and has plans to increase that amount by 4 percent annually indefinitely. You require a 12.5 percent return on this type of security. What is your estimate of the value of this stock ten years from now?

 

Answer:

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1st way:

P0=D1/(k-g)=(1.42*(1+0.04))/(0.125-0.04)=$17.37

P10=17.37(1+0.04)^10=$25.72

2nd way:

P10=D11/(k-g)=(1.42*(1+0.04)^11)/(0.125-0.04)=$25.72