Naveen Co plans to pay a dividend next year of $3.25. The
growth rate is expected to be 1.5% forever. Investors require a rate of
return of 9%. What is the stock price of Naveen Co? What will the stock
price be in 3 years?

To find the stock price of Naveen Co., we can use the Gordon Growth Model, also known as the Dividend Discount Model for a stock with constant growth. The formula is:

\[
P_0 = \frac{D_1}{r - g}
\]

Where:
- $P_0$ is the current stock price
- $D_1$ is the dividend expected next year
- $r$ is the required rate of return
- $g$ is the growth rate of the dividend

### Step 1: Calculate the current stock price
Given:
- $D_1 = 3.25$
- $r = 9\% = 0.09$
- $g = 1.5\% = 0.015$

Substitute these values into the formula:

\[
P_0 = \frac{3.25}{0.09 - 0.015} = \frac{3.25}{0.075} = 43.33
\]

Thus, the current stock price is **$43.33**.

### Step 2: Calculate the stock price in 3 years
The stock price will grow at the dividend growth rate, which is 1.5% per year. The formula for the future stock price is:

\[
P_3 = P_0 \times (1 + g)^3
\]

Substitute the values:

\[
P_3 = 43.33 \times (1 + 0.015)^3 = 43.33 \times 1.0457 = 45.32
\]

The stock price in 3 years will be **$45.32**.

### Summary:
1. The current stock price is **$43.33**.
2. The stock price in 3 years will be **$45.32**.

Would you like more details or have any questions?

### Related Questions:
1. How would the stock price change if the growth rate increased to 2%?
2. What would the stock price be if the required rate of return was 10% instead?
3. How does the Gordon Growth Model account for dividend changes over time?
4. What assumptions does the Dividend Discount Model rely on for accuracy?
5. Can this model be applied to companies that do not pay dividends?

**Tip:** The Gordon Growth Model works best for companies with a stable dividend growth rate. It may not be suitable for firms with irregular or no dividends.

Naveen Co plans to pay a dividend next year of $3.25. The growth rate is expected to be 1.5% forever. Investors require a rate of return of 9%. What is the stock price of Naveen Co? What will the stock price be in 3 years?

Learn how to calculate the stock price of Naveen Co using the Gordon Growth Model. This problem explores the dividend discount model with a constant growth rate, showing how to determine the current stock price at $43.33 and the future price in 3 years at $45.32, given a 9% required return. Suitable for college-level finance courses or advanced high school students.

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