(Two-period dividend discount model) New England Electric has projecte

QUESTION

(Two-period dividend discount model) New England Electric has projected dividends of$2.72 in one year and $3.10 in two years. If the stock is projected to sell for $48.00 in twoyears, what is the value of the stock today if the required return is 10%?
D1 = 2.71. D2=3.10. P2=48 & Ks=10% what is P0 We know Pn=Dn*(1 g)/(Ks-g) So we have P2 =D2*(1 g)/(Ks-g) Solving for g, we get P2*(Ks-g) = D2*(1 g) = D2 g*D2 ie P2*Ks D2 = g*P2

g*D2=g*(P2 D2) ie g = (P2*Ks-D2)/(P2 D2) = (48*10% -3.10)/(48 3.10) = 3.33% So P0 = D1/(Ks-g) = 2.71/(10%-3.33%) = $40.63

ANSWER:

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