Question

Reddick Enterprises' stock currently sells for $35.50 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, rs, is 9.00%. What is the stock's expected price 3 years from today? $38.83 $39.83 $40.85 $41.69

Answer 1

Answer:

$41.69

Explanation:

$\frac{divends}{return-growth} = Intrinsic \: Value$

Assuming the shares is on point and is not overrated or underrated we can solve for dividends

dividends/(r-g) = 35.50

dividends = 1.2425

Now we apply the growth for 3 years

$Principal * (1+ r)^{time} = Ammount$

$1.2425 (1.055)^{3}= 1.4589949084375$

Then we apply the dividend growth model

1.4589949084375/(0.09-0.055) = 41.68556881 = 41.69