Question
(a): The dividends that a firm pays to its stockholders are expected to grow at 3% per quarter for the next four quarters. From t=4
(a): The dividends that a firm pays to its stockholders are expected to grow at 3% per quarter for the next four quarters. From t=4 onwards, i.e. from the beginning of the fifth quarter the growth rate in dividends will drop to 1.5% per quarter, and the firm expects to be able to sustain it at this level. Assuming that the market capitalization rate is 2.5% per quarter, work out the price of the firms stock assuming that the dividend expected to be paid at t=1, i.e., at the end of the first quarter is $2.25
.(b): Rework your answer assuming that gH, the rate at which the dividends are expected to grow for the first four quarters is 2.5% per quarter.
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