A company will pay a $2 per share dividend in 1 year. The dividend in 2 years will be $4 per share, and it is expected that dividends will grow at 5% per year thereafter. The expected rate of return on the stock is 12%.
a. What is the current price of the stock?
b. What is the expected price of the stock in a year?
c. Show that the expected return, 12%, equals dividend yield plus capital appreciation.
Dividend per share:
Year 1 ...... .. $2.00
Year 2....... $4.00
Growth rate......... 5.00%
Expected rate of return.. 12.00%