Question

Womack Toy Company’s stock is currently trading at $25 per share. The stock’s dividend is projected to increase at a constant rate of 7 percent per year. The required rate of return on the stock, ks, is 10 percent. What is the expected price of the stock 4 years from today?

Answer 1

Answer: $32.77

Explanation:

Given the following :

Current price of stock = $25

Growth rate of Dividend per annum= 7%

Required return on stock = 10%

Period = 4 years

Expected price of stock after 4 years can be calculated using the relation :

Current price × ( 1 + growth rate)^period

Expected price = $25(1 + 7%)^4

Expected price :

$25 × ( 1+ 0.07)^4 = $25 × (1.07)^4

= $25 × 1.31079601

= $32.76990025 = $32.77