Question: Example 8.2 Nonconstant Growth Suppose a stock has a current dividend of $3. In the first 4 years, the stock will grow at 8% per

Year 1 dividend:

Year 2 dividend:

Year 3 dividend:

Year 4 dividend:

Required return: 12.0%

After the fourth year, the dividends will grow at: 6.0% What is the price of the stock? First, we need to find the price of the stock when it begins a constant growth rate, which is in Year 4. The price of the stock in Year 4 will be:

The price today is the present value of the future dividends, plus the present value of the future price, so:

price today:

Example 8.2 Nonconstant Growth Suppose a stock has a current dividend of

Example 8.2 Nonconstant Growth Suppose a stock has a current dividend of $3. In the first 4 years, the stock will grow at 8% per year. The stock will pay the following dividends and has the following required return: Year 1 dividend: Year 2 dividend: Year 3 dividend: Year 4 dividend: Required return: 12.0% After the fourth year, the dividends will grow at: 6.0% What is the price of the stock? First, we need to find the price of the stock when it begins a constant growth rate, which is in Year 4. The price of the stock in Year 4 will be: Price in Year 4: The price today is the present value of the future dividends, plus the present value of the future price, so: Price today

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