Homework Answers
Next year dividend = Current year dividend (1 + growth rate)
D1 = 2 (1 + 0.20) = 2 (1.2) = $2.40
D2 = 2.4 (1 + 0.20) = 2.4 (1.2) = $2.88
D3 = 2.88 (1 + 0.20) = 2.88 (1.2) = $3.456
D4 = 3.456 (1 + .05) = 3.456 (1.05) = $3.6288
Expected future price:
P3 = D4 / (r - g) = 3.6288 / (0.15 - 0.05) = $36.288
Present value of future cash flow:
P0 = (2.4 / 1.151) + [(2.88 + 36.288) / (1.152)] + [(3.456 + 36.288) / (1.153)]
= 2.0869565217 + (39.168 / 1.152) + (39.744 / 1.153)
= 2.0869565217 + 29.6166351607 + 26.1323251418
= $57.84 Ans.
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