Final answer:
To calculate the expected price of Womack Toy Company's stock, the Gordon Growth Model is used by considering the current dividend, dividend growth rate, and required rate of return. However, the current dividend (D0) is not provided, making it impossible to give a numerical answer.
Step-by-step explanation:
To calculate the expected price of the Womack Toy Company's stock 4 years from today, we need to use the Gordon Growth Model (also known as the Dividend Discount Model). The model takes into account the current dividend, the constant rate of dividend growth, and the required rate of return. The calculation is as follows:
The formula for the price of a stock (P) in the Gordon Growth Model is P = D / (rs - g), where D is the dividend expected next year, rs is the required rate of return, and g is the growth rate.
Since the dividend is projected to grow at a constant rate, to find the expected dividend four years from now (D4), we use the formula D4 = D0 * (1 + g)^4, where D0 is the current dividend.
In this case, D0 is not directly given but we know that the stock's dividend is projected to increase at a constant rate of 3.5% per year (g = 0.035). With a required rate of return of 6.9% (rs = 0.069), we first need to calculate D4:
D4 = D0 * (1 + 0.035)^4
To find the expected price 4 years from now (P4), we divide D4 by the difference between rs and g:
P4 = D4 / (rs - g)
The solution would result in the future stock price, but as we do not have the current dividend (D0), we cannot provide the numerical answer in this example. However, the correct method has been outlined.