Santa Klaus Toys just paid a dividend of $2.80 per share. The required return is 11.1 percent and the perpetual dividend growth rate is 3.7 percent. What price should this stock sell for five years from today?
Current Price = Expected Dividend / ( Required Return - Growth Rate)
= [ Current Dividend * ( 1+ Growth Rate) ] / ( Required Return - Growth Rate)
= ( $ 2.80 * 1.037) / ( 11.1% -3.7%)
= $ 39.23782784
Price five years from now = Current Price * ( 1+ Growth Rate) ^ 5
= $ 39.23782784 * ( 1+3.7%) ^ 5
= $ 47.0542374
Hence the correct answer is $ 47.05
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