Answer: $12.875
Explanation:
Required rate of return(r) = 15%
Growth rate(g) = 3%
Do = $1.5
P = D1 ÷ (r - g)
P = current price of a share of stock
D1 = expected Dividend at year end
g = growth rate
r = investor's required rate of return
D1 = Do × (1 +g)
Therefore,
P = [(Do × (1 +g)) ÷ (r - g)]
P = [ ($1.5 × (1 + 0.03)) ÷ (0.15 - 0.03)]
P = [ ($1.5 × 1.03) ÷ 0.12]
P = [ $1.545 ÷ 0.12]
P = $12.875
