This is valued as a perpetuity: Price p0=(cf0/r)

p0 = 42,500 / 0.18 = $236,111.11

b) use Gordon growth model: Price at t=0

"P0" = D1 / (r - g),

where D1 = D0(1 +g)

D1 = 42,500(1.07) = 45,475
P = 45,475 / ( 0.18 - 0.07)
= 45,475 / 0.11
= $413,409.09

c) D1 = 42,500*1.12 = 47,600
D2 = 47,600 * 1.12 = 53,312
D3 = 53,312 * 1.07 = 57,043.84
Use Gordon growth model to determine the "terminal value" IN year 2 "P2". [Since price is forwarding looking, you
know the Price IN year 2, based on the year 3 dividend. Discount this price TWO years, since it is the price IN year 2.
A common mistake is to discount this 3 years.]
P2 = D3 / ( r - g)
P2 = 57,043.84 / (0.18 - 0.07)
= $518,580.36
P0 is the sum of the discounted cash flows. Again, be sure to discount P2 by only 2 years...
P0 = (47,600 / 1.18) + (53,312 / 1.18^2) + (518,580.36 / 1.18^2)...reduce...
= (47,600 / 1.18) + (571,892.36 / 1.18^2)
= 40,338.98 + 410,724.19
= $451,063.17