Question: Sam is considering buying a share with the following expected dividends: Time (yrs) 0 1 2 3 Dividend ($) 5.00 5.10 5.15 5.20 The dividend

Sam is considering buying a share with the following expected dividends:

Time (yrs)

0

1

2

3

Dividend ($)

5.00

5.10

5.15

5.20

The dividend is expected to grow by 2% pa in perpetuity after Year 3.

Therefore:

The dividend at t=4 will be $5.20(1+0.02)

The dividend at t=5 will be $5.20(1+0.02)^2, and so on.

Shareholders required return is 8% pa. The required return and the growth rate are effective annual returns.

Calculate the price of the stock in two and a half years (t=2.5)

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