Answer: $48.33
Explanation:
Using the Gordon Growth model:
Price of stock = Next year dividend / (Required return - growth rate)
Next year price of stock can be used to calculate year 2 dividend:
53.17 = D₂ / ( 16% - 10%)
53.17 * 6% = D₂
D₂ = $3.19
D₂ = D₁ * ( 1 + growth rate)
3.19 = D₁ * ( 1 + 10%)
D₁ = 3.19/ 1.1
= $2.90
Price of stock today:
= 2.90 / ( 16% - 10%)
= $48.33
