Answer:
$121.55
Explanation:
Given;
Stock price per share = $105
Required rate of return = 9%
Constant rate of dividend growth = 5%
As per Gordon's Growth Model, the equation for count of the stock cost dependent on profit, cost of value capital (required pace of return) and consistent pace of profit development is:
Stock Price per share = D / (r-g)
where D = dividend
r = cost of equity capital (in this problem, we take the required rate of return)
g = growth rate of dividend
Substituting the values for Stock price per share = $105, r = 0.09, g = 0.05 we need to find dividend, D
105 = D / (0.09 - 0.05)
105 = D / 0.04
105 * 0.04 = D
D = $ 4.20
Now since dividend grows at a constant rate of 5%
Dividend at the end of 3rd year = Dividend * (1 + g)3
Dividend at the end of 3rd year = 4.20 * (1+0.05)3
= 4.20 * 1.053
= 4.862
Stock price per share at the end of the 3rd year = D / (r-g)
Stock price per share at the end of the 3rd year = 4.862 / (0.09 - 0.05) = 4.862 / 0.04 = $121.55
