Question

Reddick Enterprises' stock is expected to pay a dividend of $0.8575 at the end of the year. 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 stocks expected price in 3 years from today?

Answer 1

Answer:

$30.35

Explanation:

We know,

Stock price, $P_{0}$ = $\frac{D_{1} }{k_{s} - g }$

Given,

$D_{0}$ = $0.8575

Constant Growth Rate, g = 5.50% = 0.055

Required rate of return on the stock = 9% = 0.09

As we do not know the value of $D_{1}$, we have to find it through =

$D_{0}$ x (1 + g)

Putting the value in the stock price formula for third year

$P_{3}$ = $\frac{D_{0} (1 + g)^{4} }{k_{s} - g}$

$P_{3}$ = $\frac{0.8575 (1+0.055)^{4} }{0.09-0.055}$

$P_{3}$ = $\frac{1.0623}{0.035}$

$P_{3}$ = $30.35