The current price of a stock is $55.68. If dividends are expected to be $0.80 per share forthe next five years, and the required return is 6%, then what should the price of the stockbe in 5 years when you plan to sell it? If the dividend and required return remain thesame, and the stock price is expected to increase by $1 five years from now, does thecurrent stock price also increase by $1? Why or why not

1. To calculate the price of the stock in 5 years, we can use the Gordon Growth Model, which is a version of the dividend discount model. It assumes that dividends grow at a constant rate and calculates the price of a stock based on the present value of its future dividends. The formula is:

P = D / (r - g)

Where: P = price of the stock D = dividends per share r = required rate of return g = growth rate of dividends

In this case, the dividends are constant, so the growth rate is 0. Therefore, the formula simplifies to:

P = D / r

Substituting the given values into the formula:

P = $0.80 / 0.06

P = $13.33

So, the price of the stock should be $13.33 in 5 years.

2. If the dividend and required return remain the same, and the stock price is expected to increase by $1 five years from now, the current stock price does not necessarily increase by$1. This is because the current stock price is determined by the present value of its expected future cash flows (dividends and the sale price in 5 years), discounted at the required rate of return. If the future sale price increases, the present value of that future cash flow also increases, but not by the full $1 because it is discounted back to its present value. The increase in the current stock price would be less than$1, depending on the required rate of return and the time period.