Answer:
The correct answer is $2.43.
Explanation:
The annual dividend is $1.90.
The expected rate of return is 12%.
The growth rate is 3.5%.
The current stock price will be
=[tex]\frac{dividend}{required rate of return-growth rate}[/tex]
=[tex]\frac{1.90}{12-3.5}[/tex]
=[tex]\frac{1.90}{0.085}[/tex]
=$22.35
The stock price at year 3 will be
=[tex]\frac{dividend*(1-growth rate)^3}{required rate of return-growth rate}[/tex]
=[tex]\frac{1.90*(1+0.035)^3}{12-3.5}[/tex]
=[tex]\frac{1.90*1.10}{0.085}[/tex]
=$24.78
The capital gain will be
=stock price at year 3-current stock price
=$24.78-$22.35
=$2.43
