Question

WhiteEd Inc.'s stock currently sells for $100 per share. The dividend is projected to increase at a constant rate of 2.5% per year. The required rate of return on the stock, R, is 4.5%. What is the stock's expected price 3 years from now

Answer 1

$107.69

Step-by-step explanation:

first we must determine the dividend using the Gordon growth model

stock price = dividend / (required rate of return - growth rate)

$100 = dividend / (4.5% - 2.5%)

dividend = $100 x 2% = $2

in three years, the dividend will = $2 x (1 + 2.5%)³ = $2.1537

now again we return to the Gordon growth model:

stock price = $2.1537 / 2% = $107.69