E.M.Roussakis Inc.'s stock currently sells for $45 per share.The stock's dividend is projected to increase at a constant rate of 3.75% per year.The required rate of return on the stock,r_s,is 15.50%.What is Roussakis' 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. The formula for the price of a stock at time T (P_T) is given by: P_T = D_0 * (1 + g)^(T+1) / (r - g), where D_0 is the current dividend, g is the growth rate, r is the required rate of return, and T is the number of years in the future. However, since the current dividend (D_0) is not provided, we use the current price and the growth rate to find the future price directly: P_5 = P_0 * (1 + g)^5, where P_0 is the current price, and g is the growth rate. Plugging in the values: P_5 = $45 * (1 + 0.0375)^5 = $54.09.

EMRoussakis Inc