Question

**3.**(a): The dividends that a firm pays to its
stockholders are expected to grow at 4.5% per quarter for the next
six quarters. From t=6 onwards, i.e. from the beginning of the
seventh quarter the growth rate in dividends will drop to 3% per
quarter, and the firm expects to be able to sustain it at this
level. Assuming that the market capitalization rate is 3.6% per
quarter, work out the price of the firm’s stock assuming that the
dividend expected to be paid at t=1, i.e., at the end of the first
quarter is $3.00.

(b): Rework your answer assuming that
*g _{H}*, the rate at which the dividends are
expected to grow for the first six quarters is 3.6% per
quarter.

Answer #1

a). Stock price = 536.83

b). Stock price (with first six quarters growth rate of 3.6% per quarter) = 514.48

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