b. Calculate the intrinsic value of the stock today, ^P0. Proceed by finding the present value of the dividends expected at t = 1, t = 2, t = 3, t = 4, and t = 5 plus the present value of the stock price that should exist at t = 5, ^P5. The ^P5 stock price can be found by using the constant growth equation. Note that to find ^P5 you use the dividend expected at t = 6, which is 5% greater than the t = 5 dividend.

Chapter 7: Stocks, Stock Valuation, and Stock Market Equilibrium 299