A stock is expected to pay a dividend of $1.25 at the end of the year...

A stock is expected to pay a dividend of $1.25 at the end of the year (i.e., D₁ = $1.25), and it should continue to grow at a constant rate of 7% a year. If its required return is 12%, what is the stock's expected price 5 years from today? Do not round intermediate calculations. Round your answer to the nearest cent.

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Expert Solution

Answer)

Given

Dividend	$1.25
Required Return	12%
Growth Rate	7%

Price of Stock 5 years from today = Dividend in Year 6 / (Required Return - Growth Rate)

Price of Stock 5 years from today = 1.25 (1.07)⁵ / ( 12% - 7%)

Price of Stock 5 years from today = 1.75 / 5%

Price of Stock 5 years from today = $35

jeff jeffy answered 2 years ago

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