Womack Toy Company's stock is currently trading at $25 per share. The stock's dividend is projected to increase at a constant rate of 7 percent per year. The required rate of return on the stock, ks, is 10 percent. What is the expected price of the stock 4 years from today?

Answer: $32.77

Explanation:

Given the following:

Current price of stock = $25

Growth rate of Dividend per annum = 7%

Required return on stock = 10%

Period = 4 years

Expected price of stock after 4 years can be calculated using the relation:

Current price * (1 + growth rate) ^period

Expected price = $25 (1 + 7%) ^4

Expected price:

$25 * (1 + 0.07) ^4 = $25 * (1.07) ^4

= $25 * 1.31079601

= $32.76990025 = $32.77