Question

The required rate of return is 23.55 percent. Cullumber Corp. has just paid a dividend of $3.12 and is expected to increase its dividend at a constant rate of 7.20 percent. What is the expected price of the stock three years from now? (Round answer to 2 decimal places, e.g. 15.20.) Expected price $enter the expected price of the stock three years from now rounded to 2 decimal places

Answer 1

To calculate the expected price of the stock three years from now, we can use the constant growth dividend valuation model.

Step-by-step explanation:

To calculate the expected price of the stock three years from now, we can use the constant growth dividend valuation model, also known as the Gordon Growth Model. The formula for this model is:

V = D1 / (r - g)

Where V is the expected price of the stock, D1 is the dividend expected to be paid one year from now, r is the required rate of return, and g is the dividend growth rate. In this case, we are given that the dividend just paid is $3.12, and it is expected to increase at a constant rate of 7.20 percent. The required rate of return is given as 23.55 percent. We can substitute these values into the formula to find the expected price of the stock:

V = $3.12 * (1 + 0.072) / (0.2355 - 0.072) = $enter the expected price of the stock three years from now rounded to 2 decimal places