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Nuetrik [128]
3 years ago
10

$26 per share is the current price for Foster Farms' stock. The dividend is projected to increase at a constant rate of 7.00% pe

r year. The required rate of return on the stock, rs, is 12.00%. What is the stock's expected price 5 years from today?
Business
1 answer:
ladessa [460]3 years ago
8 0

Answer:

33.94%

Explanation:

The computation of stock's expected price 5 years is shown below:-

Stock price = $26

Required return = 12%

Growth rate = 7%

Current dividend per share = Stock price × (Required return - Growth rate) ÷ (1 + Growth rate)

= $26 × (12% - 7%) ÷ (1 + 7%)

= $26 × 5% ÷ 1.07

= $1.21

Stock price in 5 years = Expected dividend ÷ (required return - Growth rate)

Expected dividend = $1.21 × (1 + 7%)^5

= $1.21 × 1.402551731

= $1.697

Stock price in 5 years = $1.697 ÷ (12% - 7%)

= $1.697 ÷ 5%

= 33.94%

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