SET-UP THE PROBLEM ONLY. A firm does not currently pay a dividend. You expect th

Question

SET-UP THE PROBLEM ONLY.

A firm does not currently pay a dividend. You expect the firm will start paying dividends in T3. You expect the first dividend at T3 to equal $2 (D3 = $2). You have come up with the following expected growth rate in dividends:

Calculate stock price at T0, if r = 12%. SET UP ONLY

I think I have the answer but let me know if this is wrong.

T0= 2(1.12)[PVIFGA r=12% g=12% T=5] + 2(1.12)^4 (1.06)^11 [PVIFGA 12%, 6%, 11] + 2(1.12)^4 (1.06)^11 (1.04) [1/(.12-.04)] [PVIF 12%, 7]

Let me know if this is right. and if not how to fix it and you will get best answer and 5 stars

Explanation / Answer

Solution :

The first dividend is paid at T= 3

Let P0 be the price of the stock at T0

P0 = $ 2 / ( 1+0.12) + $ 2 / 0.12 - 0.12 + $ 2 / 0.12 - 0.06 + $ 2 / 0.12 - 0.04

P0 = $ 1.78 + $ 33.33 + $ 25

P0 = $ 60.11

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