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D E F H 1 ] A16 x fx The constant dividend growth equation is...

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D E F H 1 ] A16 x fx The constant dividend growth equation is the present value of a growing perpetuity, but we should caution that the equation is very sensitive to the growth rate estimate. Using the same information from above, we can G K M N 52 53 54 55 Example 8.2 Nonconstant Growth 56 57 Suppose a stock has a current dividend af $3. In the first 4 years, the stock will grow at 9% per year. The stock will pay the following dividends and has the following required return: 58 59 Year 1 dividenc 50 Year 2 dividend 61 Year 3 cividend: 62 Year 4 cividend: 63 Required resum: 12.0% 64 65 After the fourth year, the dividends will grow at: , 6.0% 66 67 What is the price of the stock? First, we need to find the price of the stock when it begins a constant growth rate, which is in Year 4. The price of the stack in Year 4 will be: 6R 69 Price in Year 4: 70 71 The price today is the present value of the future dividends, plus the present value of the future price, so: 72 73 Price today 74 75 76 7R 79 30 81 82 84 85 86 87 BR

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