Answer:
What is Connolly's expected stock price in 7 years, i.e., what is ?
a. $37.52
Explanation:
Required rate of return it's equal to capital gains growths plus dividend yield
Then 11% = capital gains + 6% , so the capital gains it's equal to 5%.
First we need to find the stock price today with the information available about the value of the dividend:
P0 = Div / (r-g) = $1,6/(0,11-0,05) = $26,67
This is the stock price today of the cash flow of dividend a growth rate of 5%
To know the price at the year 7, it's necessary to find the future value applying the growth rate of 5%.
P7 = P0 (1+r)^7 = $26,67 * (1,05)^7 = $37,52
