Question

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

Answer 1

The stock's expected price 3 years from today is $41.70.

Given Information

Price (P) = $35.50

Growth (g) =5.50%  

Required Rate of Return (Re) = 9%

• The formula for Price today is P = Do(1+g)/(Re-g)

35.50 = Do(1.055) / (9% - 5.5%)

Do = 35.50*3.5% / 1.055

Do = $1.177

The dividend 4 years from now is as follows:

D4 = (1.1777*(1.055)^4

D4 = $1.459

Price at the end of 3 years is as follows

P = D4(1+g)/(Re-g)

P = $1.459 / (9% - 5.50%)

P = 1.459/3.5%

P = $41.699

P = $41.70

Therefore, the stock's expected price 3 years from today is $41.70.

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