Whited Inc.'s stock currently sells for $35.25 per share.The dividend is projected to increase at a constant rate of 3.50% per year.The required rate of return on the stock,r_s,is 11.50%.What is the stock's expected price 5 years from now?

Question

Quizplus · Accepted Answer

The expected price 5 years from now can be calculated using the dividend growth model, which is P0 = D0(1 + g) / (r - g), where P0 is the current price, D0 is the current dividend, g is the growth rate, and r is the required rate of return. To find the price 5 years from now, we first find the dividend in 5 years (D5) and then apply the model again with D5. Since the current price and the dividend growth rate are given, but not the current dividend, we rearrange the formula to find the expected price in 5 years: P5 = P0(1 + g)^5. Substituting the given values: P5 = $35.25 * (1 + 0.035)^5 = $41.87.