Question

$27.50 per share is the current price for Foster Farms' stock. The dividend is projected to increase at a constant rate of 5.50% per year. The required rate of return on the stock, rs, is 9.00%. What is the stock's expected price 2 years from today?

Select the correct answer.

$31.06

$30.91

$30.76

$30.61

$31.21

Answer 1

Stock price = Dividend in year 1/ (required rate – dividend growth rate)

27.50 = Dividend in year 1/(0.09 – 0.055)

27.50 = Dividend in year 1/ 0.035

Dividend in year 1 = $0.9625

Dividend in year 2 = $0.9625* (1+0.055) = 1.0154

Dividend in year 3 = 1.0154* 1.055 = $1.07

Stock price in year 2 = 1.07/0.09 0- 0.055

                                    = 30.57

Correct answer is D