# A stock pays dividends of $1.00 at t=1. (D1 is provided here, not D0) It is growing at 35%... ## Question: A stock pays dividends of$1.00 at t=1. (D1 is provided here, not D0) It is growing at 35% between t=1 and t=2, after which the growth rate drops to 10%, and will continue at that rate into the future. If the discount rate for this stock is 12%, what should be the value of the stock at t=0? Hint: Make a diagram indicating ranges of the growth rates and the resulting dividends.

a. $53.04 b.$21.74

c. $55.70 d.$58.41

e. $61.16 A stock pays dividends of$1.00 at t=1 (t=1 NOT t=0). Dividends are expected to grow at a constant rate of 14% into the future. With a discount rate of 24%, what should the price of the stock be at t=1? (price needed for t=1 NOT t=0) (hint: there is more than one way to do this problem).

a. $11.20 b.$11.40

c. $11.60 d.$11.80

#### Question (b)

The market value of the stock can be calculated using the dividend growth model:

{eq}Stock~value=\dfrac{D*(1+g)}{k-g}\\ where:\\ D=dividend\\ g=growht~rate\\ k=required~return\\ {/eq}

{eq}\begin{align*} Stock~value&=\dfrac{1.00*(1+.14)}{.24-.14}\\ &=\dfrac{1.14}{.10}\\ &=11.40 \end{align*} {/eq}

The market value of the stock is B. \$11.40