Question

Presently, Stock A pays a dividend of $2.00 a share, and you expect the dividend to...

Presently, Stock A pays a dividend of $2.00 a share, and you expect the dividend to grow rapidly for the next four years at 20%. Thus, the dividend payments will be

Year     Dividend

1          $1.20

2          $1.44

3          $1.73

4          $2.07

After this initial period of super growth, the rate of increase in the dividend should decline to 8%. If you want to earn 12% on investments in common stock, what is the maximum you should pay for this stock? Hint: Use non-constant growth formula to calculate price.

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