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You want to buy a stock. The last dividend was $2.00. Dividends are expected to grow at 9.00% per year for 3 years and then i
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Answer #1

D1 = 2*1.09 = 2.18

D2 = 2.18 * 1.09 = 2.38

D3 = 2.38*1.09 = 2.59

r = 0.12

G2 = 0.05

Stock value using Gordon growth model ( two stage dividend discount model) = D1/(r+1)1 + D2/(r+1)2 +D3/(r+1)3 + D3 (1 +G2)/(r-G2)/(r+1)3

= 2.18/1.12 + 2.38/(1.12)^2 + 2.59/1.12^3 + 2.59 * (1.05)/(0.12-0.05)/

1.12^3

= 1.946 + 1.897 + 1.843 +27.652

= 33.338 rounding of to 33.34

Stock price = $ 33.34

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