A common stock will pay a $2 dividend next year, $2.50 in two years, $4 in three years, and $6 in four years. After the fourth year, the dividend will grow at a 5% in perpetuity. The appropriate discount rate is 7%. 

 

a) What is the price of the stock in year 4 (right AFTER the year 4 dividend has been paid), which is the time when the dividends start growing at a constant rate of 5% forever?

  

b) What is the price of this stock today?  You may want to use a timeline to visualize the cash flows. 

c) Describe what the problems are with this method of valuing a stock. (2-5 sentences)

 

d) The "comparables" method is another method investors can use to price a stock. Briefly explain how that method works. (2-5 sentences)