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Reddick Enterprises' stock currently sells for $35.50 per share. 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 stock's expected price 3 years from today? $37.86 $38.83 $39.83 $40.85 $41.69

Respuesta :

jafransp

Answer:

E. $41.69

Explanation:

We know,

Value of stock ([tex]P_{0}[/tex]) = [tex]\frac{D_{1}}{k_{s} - g}[/tex] [In case of constant growth model]

[tex]D_{1}[/tex] = Next year or expected dividend

[tex]k_{s}[/tex] = required rate of return

g = growth rate = 5.50%

However, as there is no information regarding expected dividend, we will use the alternative formula to calculate the stock's expected price 3 years from today.

[tex]P_{3}[/tex] = [tex]P_{0}[/tex] × [tex](1 + g)^{3}[/tex]

Here, current stock price, [tex]P_{0}[/tex] = $35.50

Therefore, [tex]P_{3}[/tex] = $35.50 × [tex](1 + 0.0550)^{3}[/tex]

[tex]P_{3}[/tex] = $35.50 × 1.1742

Stock's expected price 3 years from now = $41.69 (rounded to two decimal places)

Therefore, option E is the answer.

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