Let the dividend in year n be Dn
Given,
D3 = $1
Growth for next 2 years = 30%
Hence, D4 = 1(1+0.30) = 1.30
D5 = 1.30(1+0.30) = 1.69
Growth for further periods = g = 7%
Hence, D6 = 1.68(1+0.07) = 1.80
Required return = r = 15%
Using Gordon's Growth model,
Price of stock in period 5 = P5 = D6/(r - g) = 1.80 / (0.15 - 0.07) = 22.50
Price of stock now = P0 = D3/(1+r)3 + D4/(1+r)4 + D5/(1+r)5 + P5/(1+r)5
= 1/(1+0.15)3 + 1.30/(1+0.15)4 + 1.69/(1+0.15)5 + 22.50/(1+0.15)5
= $13.43
Hence, Price of Stock now = $13.43
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