Question

Reddick Enterprises' stock currently sells for $24.50 per share. The dividend is projected to increase at a constant rate of 5.50% per year. The required rate of return on the stock,
`r_S`, is 9.00%. What is the stock's expected price 3 years from today?a. $28.77 b. $26.76 c. $24.45 d. $31.65 e. $33.66

Answer 1

a. $28.77

Step-by-step explanation:

SP0= $24.50, g 5.50%, r 9% SP3

The growth id dividends also applies to a growth in stock and we are already given sp at year zero we can calculate year 3 as

P3 = P0 (1+g)^n

=24.50(1+0.055)^3

=%28.77

Answer 2

The stock's expected price in the next 3 years is $28.77

Step-by-step explanation:

Given that

Stock price (P₀) = $24.50 per share

Growth rate (g) = 5.50% per year at a constant rate = 0.055

Years (n) = 3 years

required rate of return on the stock
`r_s` = 9.00%.

Let the stock price in the next three years be P₃

Therefore:

`P_3=P_0(1+g)^n`

Substituting values and computing:

P₃ = $24.5 × (1 + 0.055)³= $24.50 × 1.055³ = $24.50 × 1.174 = $28.77

The stock's expected price in the next 3 years is $28.77