The Gordon growth model assumes (i) Dt+1 = G Dt and (ii) Rt = R. Then, price can be expressed as Pt = X k j=1 Dt+j (R) j + Pt+k (R) k = X k j=1 G R j Dt + Pt+k (R) k = X j=1 G R j Dt = G R G Dt assuming that G R < 1 and Pt+k (R) k 0 for very large k. A company with Dt = 1 and R = 1.2 grows at G = 1.06 for the first 7 years and drops to zero (meaning G = 1) thereafter (we use G to indicate its the new growth rate). What should its current price be? Hint: derive Pt+7 to compute Pt . Pt = X 7 j=1 G R j Dt + Pt+7 (R) 7 =?