Reddick Enterprises' stock currently sells for $24.50 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,r_S,is 9.00%.What is the stock's expected price 3 years from today?

Question

Quizplus · Accepted Answer

To calculate the expected price of the stock 3 years from today, we will use the constant growth model:

P3 = D4 / (r - g)

Where:

D4 = the dividend payment 3 years from today
r = the required rate of return
g = the dividend growth rate

First, let's calculate the dividend payment 3 years from today:

D4 = D1 x (1 + g) ^ 3

Where:

D1 = the current dividend payment per share

D1 = $24.50 x 5.50% = $1.35

D4 = $1.35 x (1 + 5.50%) ^ 3 = $1.58

Next, let's plug in the values into the constant growth model:

P3 = $1.58 / (9.00% - 5.50%) = $28.77

Therefore, the expected price of the stock 3 years from today is $28.77. The correct answer is C).

Reddick Enterprises' Stock Currently Sells for $24