ABC Inc.'s stock currently sells for $25.25 per share. The dividend is projected to increase at a constant rate of 3.50% per year. The required rate of return on the stock, rs, is 11.50%. What is the stock's expected price 5 years from now?

$29.98

Explanation:

The computation of the stock expected price 5 years from now is shown below:

But before that we need to determine the following calculation

Stock price = current year dividend ÷ (required rate of return - growth rate)

$25.25 = Current year dividend ÷ (11.50% - 3.50%)

$25.25 = Current year dividend ÷ 0.08

So, the current year dividend is

= $25.25 × 0.08

= $2.02

Now the stock price 5 years from now is

= Current year dividend × (1 + growth rate)^number of years ÷ (required rate of return - growth rate)

= $2.02 × (1 + 0.035)^5 ÷  (11.50% - 3.50%)

= $2.02 × (1 + 0.035)^5 ÷ 0.08

= $29.98

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