What is the amount that should be paid for a stock that will

What is the amount that should be paid for a stock that will pay a dividend of $5.60 in one year and $5.55 in two years? After that, the stock price will grow at a constant 5% per year forever. The appropriate discount rate is 12%.

Solution

Price of stock =d1/(1+r)+d2/(1+r)^2+(d2*(1+g)/(r-g))/(1+r)^2

=5.6/1.12+5.55/(1.12)^2+(5.55*(1.05)/(.12-.05))/(1.12)^2

=5+4.4244+66.3664=$75. 7908