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Reddick Enterprises' stock is going to pay a dividend of $5 in the next year. Since...

Reddick Enterprises' stock is going to pay a dividend of $5 in the next year. Since then 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 present value of the 3rd year dividend? What is the price of the stock at the end of the 3rd year? (6 points Hint: to solve for P3 you need to use Div4)

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Expert Solution

1)present value of 3 year dividend =PVF 9%,D3

               = .77218* 5.565125

              = $ 4.2973

2)D4 =D1(1+g)^3

     = 5 (1+.055)^3

     = 5*1.17424

     = 5.8712

Price at year3 =D4/(Rs-g)

           = 5.8712/ (.09-.055)

           = 5.8712 /.035

           = $ 167.75 per share

jeff jeffy answered 2 years ago
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