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An investor plans to hold Newco’s stock for 3 years. In that time period, Newco plans...

  1. An investor plans to hold Newco’s stock for 3 years. In that time period, Newco plans to grow at a rate of 6% in the first two years and 3% thereafter. Newco’s last dividend was $0.25. Given a rate of return of 10%, what is the value of Newco’s common stock at the end of the 3-year time period?
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Answer #1

Where, Pn is the price in the nth year

Dn is the dividend in the nth year

g is growth rate

r is required return

Price of the stock at the end of 3rd year is calculated below

Dividend in the 3rd year is calculated with the following equation

  

= 4.26

The value of the stock at the end of 3 year time period is therefore = $4.26

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