A stock is expected to pay dividends of $1.25 one year from now (t-1), $1.50 two years from now, $1.75 three years from

[answerhappygod]

A Stock Is Expected To Pay Dividends Of 1 25 One Year From Now T 1 1 50 Two Years From Now 1 75 Three Years From 1 (31.83 KiB) Viewed 34 times

A stock is expected to pay dividends of $1.25 one year from now (t-1), $1.50 two years from now, $1.75 three years from now, with all subsequent dividends growing at a rate of 4%. That is, the year 4 dividend is 4% higher than the year 3 dividend, and the year 5 dividend is 4% higher than the year 4 dividend, and so on. Assume that the appropriate discount rate for the stock is 8.8%. Draw a timeline of the dividends from t=0 to t-6. Calculate the stock price using the Gordon Growth model at t=2. Denote this as P. What is the price of the stock today (at t-0)? Calculate this by adding up the present values of D₁, D₂, and P₂. Suppose an investor bought the stock today and plans to sell it in 3 years. What is the present value of all future cash flows they will receive? Note that they will receive three dividends, plus the price of the stock sold at t-4. Compare your answer to that of part c.