Question

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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

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, r, 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 Pa you need to use Div4)

Expert Solution

Dividend in Year 1= $ 5

Dividend in Year 2= $ 5 * ( 1+5.5%)

= $ 5.275

Dividend in Year 3 = $ 5.275 * ( 1+5.5%)

= $ 5.565125

Present Value of Dividend in Year 3 = $ 5.565125% * 1/(1.09) ^ 3

= $ 5.565125% * 0.77218348

= $ 4.29729589

= $ 4.30

Hence the correct answer is $ 4.30

Note : The answer is rounded off to two decimal places.

Price at Year 3 = Expected Dividend in year 4 / ( Required Return - Growth Rate)

= $ 5.871206875 / ( 9% -5.5%)

= $ 167.75

Hence the correct answer is $ 167.75

Note :

Dividend in Year 4= $ 5.565125* ( 1+5.5%)

= $ 5.871206875

jeff jeffy answered 2 years ago

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