Answer to Question #198405 in Economics for Muhammad Ammar Kha

Question

1.     The Canning Company has been hit hard due to increased competition. The company's analysts predict that earnings (and dividends) will decline at a rate of 5% annually into the foreseeable future. Assume that ks = 11% and D0 = $2.00. What will be the price of the company's stock in three years?

 

Answer 1

Dividend in 3 years is:

$D3 = 2×0.95^3 = 1.715.$

Price in 3 years is:

$P3 = 1.715/(0.11 + 0.05) = 10.72.$