Final answer:
To find Connolly Co.'s expected stock price in 2 years, use the Gordon Growth Model. The possible causes of a rise in stock price can be an increase in expected dividends, a decrease in the required return, or an increase in the expected growth rate. We can calculate the stock price in 2 years using the formula: P0 = $2.60 / (0.12 - 0.04) = $2.60 / 0.08 = $32.50.
Step-by-step explanation:
To find Connolly Co.'s expected stock price in 2 years, we can use the Gordon Growth Model. The formula for the Gordon Growth Model is P0 = D1 / (rs - g), where P0 is the stock price, D1 is the expected dividend for the next year, rs is the required return, and g is the growth rate. In this case, D1 is given as $2.60, rs is 12.00%, and the dividend yield is 8.00%, which means the growth rate (g) can be calculated as (rs - dividend yield) / 100. Plugging in the values, we get g = (12.00% - 8.00%) / 100 = 0.04. Now we can calculate the stock price in 2 years using the formula: P0 = $2.60 / (0.12 - 0.04) = $2.60 / 0.08 = $32.50.
The possible causes of a rise in stock price can be an increase in expected dividends, a decrease in the required return, or an increase in the expected growth rate. If Connolly Co. is able to increase its expected dividends, investors would be willing to pay more for the stock. Similarly, if the required return decreases or the expected growth rate increases, the stock price can rise. Factors that can cause these changes include improved company performance, favorable industry conditions, or positive market sentiment.