a.

Zero Growth

P0= D0/Rs= 1.8/0.12 15

Stock's value should be $15 p

b. Constant dividend growth model

P0= D1/(Rs- g) D1= D0*(1+g)=1.8*(1+0.0

1.8 *(1+.05)/(.12-0.05) 27

c. Variable growth model

Growth rate, g (from Y1-Y3)

D1 D2
P0= + +
(1+Rs)^1 (1+Rs)^2

1.89 1.98
+ +
 + +
(1+0.12)^1 (1+0.12)^2

1.69 1.58

P0= 23.96
 D0= 1.8
Req. Return on Common Stock or Cost of Equity, Rs=12%

Stock's value should be $15 per share under 0% dividend growth rate assumption

g= 5% Rs= 12% D0=1.8

D1= D0*(1+g)=1.8*(1+0.05)/(.12-.05)

e, g (from Y1-Y3) 5% or .05

g (constant rate), gt= 4% or 0.04

TV3= D4/(Rs-gt)
D3+ {D4/(Rs-gt)}
(1+Rs)^3 D1= D0(1+g)=1.8*(1+.05) 1.89
D2= D1 (1+g)=1.89*(1+.05) 1.98
2.08+ {2.16/(0.12-0.04)} D3= D2 (1+g)=1.98*1.05 2.08
(1+0.12)^3 D4= D3 (1+gt)=2.08*1.04 2.16

20.70
uity, Rs=12%

umption