Question

Given a required rate of return of 24.90 percent, Pharah Corp. has just paid a dividend of $3.12 and is expected to increase its dividend at a constant rate of 5.15 percent. What is the expected price of the stock three years from now? (Round answer to 2 decimal places, e.g., 15.20.)

A) $3.92

B) $4.18

C) $4.65

D) $5.02

Answer 1

The expected price of the stock three years from now is approximately $15.78.

Step-by-step explanation:

In order to calculate the expected price of the stock three years from now, we can use the formula for the dividend discount model (DDM). The DDM formula is:

Price = Dividend / (Required Rate of Return – Dividend Growth Rate)

Plugging in the given values, the calculation would be:

Price = $3.12 / (0.2490 - 0.0515)

Price = $3.12 / 0.1975

Price ≈ $15.78

Therefore, the expected price of the stock three years from now is approximately $15.78.