without expanding find
-2 3 6
0 5 4
+10 -15 -30
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The value of the stock today is $4.86
Explanation:
Hi, first we need to find the value of dividend 4, 5 and 6, ths las one we will use to find the perpetuity value of this stock (since it will grow at 8% from year 5). So, let´s go ahead and find D4, D5 and D6
$$\begin{lgathered}D4=0.50*(1+0.28)=0.64\\D5=0.64*(1+0.28)=0.8192\\D6=0.8192*(1+0.28)=0.884736\end{lgathered}$$
Now, we need to find the price of this stock, for that we have to bring to present value all those cash flows.
$$Price=\frac{D3}{(1+0.18)^{3} } +\frac{D4}{(1+0.18)^{4} } +\frac{D5}{(1+0.18)^{5} } +\frac{D6}{(r-g)} (\frac{1}{(1+0.18)^{5} } )$$
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