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Question 40  DDM, perpetuity with growth

A stock is expected to pay the following dividends:

Cash Flows of a Stock
Time (yrs) 0 1 2 3 4 ...
Dividend ($) 0.00 1.00 1.05 1.10 1.15 ...
 

After year 4, the annual dividend will grow in perpetuity at 5% pa, so;

  • the dividend at t=5 will be $1.15(1+0.05),
  • the dividend at t=6 will be $1.15(1+0.05)^2, and so on.

The required return on the stock is 10% pa. Both the growth rate and required return are given as effective annual rates.

What will be the price of the stock in three and a half years (t = 3.5)?




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