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What is the price of the stock in year 4

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Reference no: EM132842618

A common stock will pay a $2 dividend next year, $2.50 in two years, $4 in three years, and $6 in four years. After the fourth year, the dividend will grow at a 5% in perpetuity. The appropriate discount rate is 7%.

a) What is the price of the stock in year 4 (right AFTER the year 4 dividend has been paid), which is the time when the dividends start growing at a constant rate of 5% forever? Show your calculations.

b) What is the price of this stock today? Show your calculations. You may want to use a timeline to visualize the cash flows.

c) Describe what the problems are with this method of valuing a stock. (2-5 sentences)

d) The "comparables" method is another method investors can use to price a stock. Briefly explain how that method works. (2-5 sentences)

Reference no: EM132842618

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