Question

A stock is expected to pay a dividend of $1.00 at the end of the year (i.e., D1 = $1.00), and it should continue to grow at a constant rate of 4% a year. If its required return is 15%, what is the stock's expected price 3 years from today? Round your answer to two decimal places. Do not round your intermediate calculations.

Answer 1

$10.23

Step-by-step explanation:

The constant growth dividend model can be used to determine the value of the stock

according to the constant dividend growth model

price = d1 / (r - g)

d1 = next dividend to be paid

r = cost of equity

g = growth rate

Dividend price in 3 years = D x (1 + g)^t

g = growth rate = 4%

t = time = 3

d = dividend = 1

$1 x (1.04)^3 = 1.124864

price = $1.124864 / (0.15 - 0.04) = $10.23