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The stock price today can be modeled as the present value of future dividends. The challenge in using this approach is (1) deciding on the
The stock price today can be modeled as the present value of future dividends. The challenge in using this approach is (1) deciding on the right discount rate for the dividends, and (2) guessing what future dividends will be. Assume you have already decided that the cost of equity is 10% and are now trying to decide what the future dividends will be. The company has forecast that the dividend 1 period from today will be $4 per share. For the dividends after the first year you decide to use a "two-stage" model for future dividends. You assume the dividends will grow at 5% a year after the $4 per share dividend in one year. You assume the 5% growth will continue to the 5th year (5th dividend) but then drop to 3% a year starting with the sixth dividend. What is your forecast for the dividend in year 6? $4.86 $4.63 $5.01 $4
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