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.A stock pays a dividend of $2 for the first 3 years then the dividends are expected to grow at 6% per year afterwards. If th

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Answer #1

1.

Let Dividend Paid in year n be Dn

Growth rate after 3 years = g = 6%

Required Rate of return = r = 8%

Given, D1 = 2
D2 = 2
D3 = 2
D4 = 2(1+0.06) = 2.12

According to Gordon's Growth model,

P3 = D4/(r-g) = 2.21/(0.08 - 0.06) = 110.5

Present Value = P0 = D1/(1+r) + D2/(1+r)2 + D3/(1+r)3 + P3/(1+r)3

= 2/(1+0.08) + 2/(1+0.08)2 + 2/(1+0.08)3 + 110.5/(1+0.08)3

= $92.87

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