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Suppose the stock price is given by:
Pt== (Dt+1)/(1+rp+rf) + (EtPt+1)/(1+rp+rf)
Pt= price of stock at time t
Dt+1 = dividend payment at time t+1
rp= risk premium
rf= risk free rate (treasury rate)
EtP t+1= expected price of stock at period t+1
a. show how to derive the current stock price as a function of stock prices at time t+3 and derive the expression for the stock price as a function of only the present discounted value of expected dividends. Explain what assumptions you need to make in order to obtain this answer.
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