Question

A stock is expected to pay a dividend of $0.75 at the end of the year (i.e., D1 = $0.75), and it should continue to grow at a constant rate of 6% a year. If its required return is 14%, what is the stock's expected price 3 years from today? Round your answer to two decimal places. Do not round your intermediate calculations.

Answer 1

Answer:

Stock's expected price 3 years from today = $11.165775

Explanation:

Provided information

and using dividend growth model we have,

D1 = $0.75

g = 6%

Ke = 14%

For cost at the end of 3 years we need to calculate D4

D2 = D1 + g = $0.75 + 6% = $0.795

D3 = D2 + g = $0.795 + 6% = $0.8427

D4 = D3 + g = $0.8427 + 6% = $0.893262

P3 = Price at the end of year 3 = $\frac{D4}{Ke - g} = \frac{0.893262}{0.14-0.06}$

P3 = 11.165775