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8. Firm B is expected to pay a dividend of $2.00 at the end of Year 1 and $3.00 at the end of Year 2. The firm is expected to pay $3.15 (5% greater than the dividend in Year 2) in Year 3, and the company will continue to pay dividends at the 5% growth rate afterward. Compute the expected stock price today, given the required rate of return is r. 8%.
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Answer #1

A multistage gordon dividend discount model will help us to solve the problem.

Year 1 & 2 is solved by finding the present value of dividends for year 1 & 2 (attached in the image)

Terminal value is present value of Dividend/(growth rate - required rate)

Sum of high growth periods (in this case,year 1 & 2) and terminal value is the expected value of Firm B today.

Growth rate Dividend per share PV at t-0 Formula Yearl Year Terminal value 2.00 S 1.85 (2(1+0.08)*1 2.57 31+0.08 2 45.00 =3.13(1596-890) 4942 SUMI19:121) 3.00 S 15% Cost of capital 8% Expected priceof stock today -$49.42 this colour cells are what was available in the question

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