Question

Kelly Enterprises' stock currently sells for $35.25 per share. The dividend is projected to increase at a constant rate of 4.50% 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?

Select the correct answer.

a. $42.04

b. $40.54

c. $41.04

d. $41.54

e. $40.04

Answer 1

Value of Stock is given by

Di don Rateof Return - Growth Rate

D1 35.25 = 0.115 -0.045

D₁ = 35.25 * 0.07 =2.4675

Value after 5 years
_{D. Rateof Return - Growth Rate}

D₆ = D₁(1+growth rate)⁴

= 2.4675(1+0.045)⁴

= 2.94253964702

Valueafter5years = 2.94253964702 0.115 -0.045

= $42.04

Value after 5 years will be $42.04

Option A is correct

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