CHAPTER 7

Ex 23:
D 0 ×(1+ g) $ 3 ×(1+ 7 %)
Current price¿ = =$ 29.18
I −G 18 %−7 %
The expected current price of stock is $29.18.
Ex 24:
Dividend growth rate= Required rate of return –
expected dividend payment 1
=0.1− ≈ 0.0848
current stock price 65.88

The dividend growth rate is 8.48%

The value of the stock after 5 years = current stock price × (1+dividend growthrate)5

The value of the stock after 5 years = 65.88 × (1.0848)5

The value of the stock after 5 years =65.88 × 1.502271342

The value of the stock after 5 years =$98.97

Explain: The current stock price is the present value of all cash flows (dividends) discounted at
the required rate of return after adjusting the dividend growth rate, and hence will not change.