The price of DDS Corporation stock is expected to be $45 in 5 years. Dividends are anticipated to increase at an
annual rate of 10 percent from the most recent dividend of $1.00.
If your required rate of return is 15 percent,
how much are you willing to pay for DDS stock?
The expected cash flows are the future dividends plus the future selling price,
Year D PV @ 15%
1 1.10 .96
2 1.21 .91
3 1.33 .88
4 1.46 .84
5 1.61 .80
$4.39 =PV of dividends only
P = $4.39 + ($68/(1.155 = 22.37 ) = $26.76
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