Question

$35.50 per share is the current price for Foster Farms' stock. The dividend is projected to increase at a constant rate of 5% per year. The required rate of return on the stock, rs, is 10%. What is the stock's expected price 3 years from today?

Answer 1

Today's Stock Price = $\large \frac{D_{0}(1+G)}{Rate of Return- G}$

35.50 = $\large \frac{D_{0}(1+0.05)}{0.10- 0.05}$

D₀ = $\large \frac{1.775}{1.05}$

D₀ = 1.69

Dividend at Year 0 is $ 1.69

Dividend at year end 3 or beginning of year 4 = 1.69(1+0.05)⁴

D₄    = $ 2.054

Value of Stock 3 years from today =

DA Rateof Return - Growth Rate

= $\bg_white \large \frac{2.054}{0.10- 0.05}$

= 41.08

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