Let Dividend in Year n be denoted by Dn
Given, D0 = $1.50
Growth rate of Years 1 to 3 = g1 = 20%
Hence,
D1 = D0(1+g1) = 1.50(1+0.20) = $1.80
D2 = D1(1+g1) = 1.80(1+0.20) = $2.16
D3 = D2(1+g1) = 2.16(1+0.20) = $2.59
Growth rate for subsequent years = g = 5%
Hence, D4 = D3(1+g) = 2.59(1+0.05) = $2.72
Required Rate of Return = r = 10%
Using Gordons Growth model,
Price of Stock in Year 3 = P3 = D4/(r - g) = 2.72/(0.10 - 0.05) = $54.4
Hence, Price of stock now = P0 = D1/(1+r) + D2/(1+r)2 + D3/(1+r)3 + P3/(1+r)3
= 1.80/(1+0.10) + 2.16/(1+0.10)2 + 2.59/(1+0.10)3 + 54.4/(1+0.10)3
= $46.24
5. [Ch 9] Primanti Brothers' last dividend was $1.50. The dividend growth rate is expected to...
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