rayray records' stock currently sells for $199.00 per share. the dividend is projected to increase at a constant rate of 3.9% per year. the required rate of return on the stock, rs, is 9%. what is the stock's expected price 7 years from today, $ xxx.xx, no $ sign?

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 = $199, r = 0.09, g = 0.039 we need to find dividend, D

199 = D / (0.09 - 0.039)

199 = D / 0.051

199 * 0.051 = D

D = $ 10.149

Now since dividend grows at a constant rate of 3.9%

Dividend at the end of 7th year = Dividend * (1 + g)7

Dividend at the end of 7th year = 10.149 * (1+0.039)7

= 10.149 * 7.273

= 73.81

Stock price per share at the end of the 7th year = D / (r-g)

Stock price per share at the end of the 7th year = 73.81/ (0.09 - 0.039)

= 73.81 / 0.051

= $1,447.25

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