Answer:
option (E) $36.75
Explanation:
Given:
Dividend growth rate, g = 2% = 0.02
Required return, r = 14% = 0.14
Now,
The value of the stock
= Present value of ( Dividend of 4.40 to be received next year + Dividend of 4.50 to be received the year after the next year + Value of the share as at the beginning of the third year )
Thus,
The price of the share
=[tex]\frac{4.40}{(1+g)^1}[/tex] + [tex]\frac{4.50}{(1+g)^2} +\frac{\frac{4.50\times(1+g)}{(r-g)}}{(1+r)^2}[/tex]
= [tex]\frac{4.40}{(1+0.02)^1}[/tex] + [tex]\frac{4.50}{(1+0.02)^2}[/tex] + [tex]\frac{\frac{4.50\times(1+0.02)}{(0.14-0.02)}}{(1+0.02)^2}[/tex]
= 3.86 + 3.46 + 29.43
= $36.75
Hence,
the correct answer is option (E) $36.75
