QUESTION 4 "You expect Caterpillar will pay dividends of 2.25 in one year, 2.50 in two years, and 2.75 in three yea...

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Answer 1

Answer #1

Value after year 3=(D3*Growth rate)/(Required rate-Growth rate)

=(2.75*1.07)/(0.12-0.07)

=$58.85

Hence current price=Future dividend and value*Present value of discounting factor(rate%,time period)

=2.25/1.12+2.5/1.12^2+2.75/1.12^3+58.85/1.12^3

=$47.85(Approx).

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Answer 2

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