Answer:
$30.35
Explanation:
We know,
Stock price, [tex]P_{0}[/tex] = [tex]\frac{D_{1} }{k_{s} - g }[/tex]
Given,
[tex]D_{0}[/tex] = $0.8575
Constant Growth Rate, g = 5.50% = 0.055
Required rate of return on the stock = 9% = 0.09
As we do not know the value of [tex]D_{1}[/tex], we have to find it through =
[tex]D_{0}[/tex] x (1 + g)
Putting the value in the stock price formula for third year
[tex]P_{3}[/tex] = [tex]\frac{D_{0} (1 + g)^{4} }{k_{s} - g}[/tex]
[tex]P_{3}[/tex] = [tex]\frac{0.8575 (1+0.055)^{4} }{0.09-0.055}[/tex]
[tex]P_{3}[/tex] = [tex]\frac{1.0623}{0.035}[/tex]
[tex]P_{3}[/tex] = $30.35
