Homework Answers
Dividend to be Paid now = D0 = $90
Growth in dividend = g = -2%
Dividend in next year = D1 = D0(1+g) = 90(1-0.02) = $88.2
Discount Rate = r = 12%
Using Gordon's Growth model,
Price of Stock now = P0 = D1/(r - g) + D0 = 88.2/(0.12 - (-0.02)) + 90 = $720
We have added D0 since the Dividend has not been paid till now
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