Answer to Question #161680 in Financial Math for james

Question

BAM Corp's current stock price is P35.00, its last dividend was P2.5, and its required rate of return is 12%. If dividends are expected to grow at a constant rate in the future, what is BAM's expected stock price 3 years from now?

Answer 1

First divide the dividend payment by the current stock price

$\frac{2.5}{35}\ =\ 0.0714$

Next add expected dividend growth rate to get the stock’s expected growth rate

$\frac{12}{100}\ +\ 0.0714$

Then add 1 to the expected growth rate

$1\ +\ 0.0714$

Raise the expected growth rate to the number of years to get the future stock price

${1.0714}^{3\ \ }\ast\ 35$

$The\ stock\ price\ in\ 3years\ will\ be\ P43.05$