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    alib's Avatar
    alib Posts: 1, Reputation: 1
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    #1

    Jul 21, 2009, 07:43 PM
    calculating dividends
    dividends of $2.00 was paid yesterday, dividend is expected to grow indefinitely at a 6% rate.
    what is the firm's expected dividend stream over the next 3 yrs?
    what is the firm's current stock price/
    what is the stock's expected value one yr from now?

    can u explain ow I should do this and if psssible formulas that I can work with.
    ROLCAM's Avatar
    ROLCAM Posts: 1,420, Reputation: 23
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    #2

    Jul 22, 2009, 04:26 AM

    Dividend = $2.00

    Year one = $2.00 * 1.06 = $2.12
    Year two = $2.12 * 1.06 = $2.2472
    Year three = $2.2472 * 1.06 = 2.382032

    Not enough information to answer the other two questions.
    ArcSine's Avatar
    ArcSine Posts: 969, Reputation: 106
    Senior Member
    		  
    #3

    Jul 22, 2009, 05:03 AM
    As ROLCAM points out, you need one more bit of data--the appropriate discount rate.

    With that number in hand, use the Gordon Growth Model (aka "Gordon-Shapiro") to determine the stock price, both today and one year out.

    Check your text for a discussion of the model, which takes the form



    where p is the stock price; r is the discount rate; g is the constant growth rate; and is the expected dividend, one period away from the point at which you're pricing the stock. (Your book may use different notation for the variables, but the model's form is the same.)

    As a side note, you can check your stock-price calcs by verifying that your stock price is growing at the same rate as the dividends. In other words, if your calcs are correct you'll see that there's a 6% appreciation in the stock price over the one-year period.

    I hope that helped a bit.
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