Homework Answers
value of stock = Present value of dividends + Horizontal value
Horizontal value = dividend next year/(Required return - growth rate)
=>
Horizontal value = 2*1.2^3 * 1.05/(0.09-0.05)
= 90.72
value of stock = 2*1.2/1.09 + 2*1.2^2/1.09^2 + 2*1.2^3/1.09^3 + 90.72/1.09^3
= 77.35
choose, uses the required rate of return to discount all promised bond cash flows
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