Answer:
$14.25
Step-by-step explanation:
We can use DDM (Dividend Discount Model) to answer this.
Firstly we have:
[tex]D_1=D_{0}(1+g)[/tex]
Where D_1 is the dividend next year
D_0 is current divident
g is the growth rate (or decline rate)
We need to find until D_3 since we want stock price in 3 years.
So,
we know D_0 = 2
g = -0.05
Now, we have:
[tex]D_1=D_{0}(1+g)\\D_1=2(1-0.05)\\D_1=2(0.95)\\D_1=1.9[/tex]
Now calculating D_2:
[tex]D_2=D_{1}(1+g)\\D_2=1.9(0.95)\\D_2=1.805[/tex]
Calculating D_3:
[tex]D_3=D_{2}(1+g)\\D_3=1.805(0.95)\\D_3=1.7 1[/tex]
The stock price follows the formula:
[tex]Value=\frac{D_3}{r-g}[/tex]
Where D_3 is dividend in 3 years [1.71]
r is the required rate of return [17%]
g is the growth rate [-0.05]
Now, we have:
[tex]Value=\frac{D_3}{r-g}\\Value=\frac{1.71}{0.17-0.05}\\Value=14.25[/tex]
Thus, $14.25 in 3 years
