Question

Reddick Enterprises' stock is expected to pay a dividend of $0.8575 at the end of the year. the dividend is projected to increase at a constant rate of 5.50% per year. the required rate of return on the stock, rs, is 9.00%. what is the stocks expected price in 3 years from today?

Answer 1

$30.35

Step-by-step explanation:

We know,

Stock price,
`P_(0)` =
`(D_(1) )/(k_(s) - g )`

Given,

`D_(0)` = $0.8575

Constant Growth Rate, g = 5.50% = 0.055

Required rate of return on the stock = 9% = 0.09

As we do not know the value of
`D_(1)`, we have to find it through =

`D_(0)` x (1 + g)

Putting the value in the stock price formula for third year

`P_(3)` =
`(D_(0) (1 + g)^(4) )/(k_(s) - g)`

`P_(3)` =
`(0.8575 (1+0.055)^(4) )/(0.09-0.055)`

`P_(3)` =
`(1.0623)/(0.035)`

`P_(3)` = $30.35