Final answer:
To calculate the expected price of Fintech, Inc.'s stock five years from now, one would use the Gordon Growth Model taking into account the last dividend, the constant dividend growth rate, and the required rate of return. The last known dividend is grown at 5 percent for five years, and then the dividend expected in five years is used in the model to find the expected price.
Step-by-step explanation:
The expected price of Fintech, Inc. stock five years from now, given a 5 percent constant rate of increase in dividends and a 20 percent required rate of return, can be calculated using the Gordon Growth Model. The model is a version of the discounted cash flow (DCF) method which assumes dividends grow at a constant rate indefinitely. The last dividend (D0) was $2.65, so the first dividend in this scenario (D1) will be $2.65 multiplied by 1.05 (which accounts for the 5 percent growth), giving us $2.78. The expected dividend in five years (D5) is calculated by growing $2.78 at 5 percent for five years. Once D5 is obtained, it is divided by the difference between the required rate of return (k) and the growth rate (g), which is 0.20 - 0.05 in this case. Unfortunately, without performing the actual calculation, we cannot determine which provided answer option is correct, but the calculation method explained should enable Johnny or any other investor to find the expected price of the stock five years from now.