Question

Kelly Enterprises' stock currently sells for $35.25 per share. The dividend is projected to increase at a constant rate of 6.50% per year. The required rate of return on the stock, rs, is 11.50%. What is the stock's expected price 5 years from now?

Answer 1

To calculate the expected price of the stock 5 years from now, use the Gordon Growth Model formula. Plugging in the given values, the expected price is $89.06 per share.

Step-by-step explanation:

To calculate the expected price of the stock 5 years from now, we can use the Gordon Growth Model formula. The formula is P = (D0 * (1+g))/(rs-g), where P is the expected price, D0 is the current dividend, g is the annual growth rate, and rs is the required rate of return. Plugging in the given values: D0 = $35.25, g = 6.50%, and rs = 11.50%. We get P = ($35.25 * (1+0.065))/(0.115-0.065) = $89.06. Therefore, the expected price of the stock 5 years from now is $89.06 per share.