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5. The Double Dip Co. wants to reduce its annual dividend by 2 % a year for the next three y After that, it will maintain a c

please show steps and provide explanation. thanks!

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Answer #1
Year Dividend present value factor @ 5% Dividend*present value factor
1 1.20 (1-.02)= 1.176 .95238 1.12
2 1.176(1-.02)= 1.15248 .90703 1.0453
3 1.15248(1-.02)= 1.1294304 .86384 .9756
Terminal value at year 3 20 .86384 17.2768
Current stock price 20.42

Working :

Terminal value at year 3 : Dividend /rs

                     = 1/.05

                       = 20

Find present value factor using the formula 1/(1+i)^n where i= 5% and n= 1,2,3, or from present value table at 5%

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