Question

38.00 per share is the current price for Foster Farms' stock. 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 stock's expected price 3 years from today?

Select the correct answer.
a. $43.58
b. $43.84
c. $44.62
d. $44.10
e. $44.36

Answer 1

To calculate the expected price of a stock, we can use the Gordon Growth Model. According to the model, the expected price of a stock is equal to the next dividend divided by the difference between the required rate of return and the dividend growth rate.

Step-by-step explanation:

To calculate the expected price of a stock, we can use the Gordon Growth Model. According to the model, the expected price of a stock is equal to the next dividend divided by the difference between the required rate of return and the dividend growth rate. The dividend growth rate is given as 5.50% per year and the required rate of return is 9.00%. Therefore, the expected price 3 years from today can be calculated as follows:

Expected Price = Dividend / (Required Rate of Return - Dividend Growth Rate)

Expected Price = 38.00 / (0.09 - 0.055)

Expected Price = 38.00 / 0.035

Expected Price = 1085.71

Therefore, the stock's expected price 3 years from today is $1085.71. None of the options provided in the question match this value, so none of the options is correct.