Answer:
$42.604
Explanation:
Using dividend growth model we have D1 = $1.25, dividend at end of year 1
P1 = $45 price at the end of year 1
Ke = 10% Cost of capital or expected return
g = ? the growth rate expected
Thus
D2 = D1 + g
$45 = [tex]\frac{1.25+g}{0.10-g}[/tex]
$4.5 - 45g = 1.25 + g
$3.25 = 46g
7.06% = g
Now, using value of g we have
P0 = [tex]\frac{1.25}{0.10-0.0706}[/tex]
Current price P0 = $42.604
