Answer:
First we need to use the ddm model when the growth rate is constant and find the price then,because the ddm model cannot be used when the growth rate is not constant and then discount it back to present value at 12% which is the required return.
Last dividend = $4
Dividend one year from now = 4*1.015=4.06
Dividend 2 years from now = 4.06*1.015=4.12
Growth rate 2 years from now = 8%
R= 12%
Price = D*(1+G)/(R-G)
=4.12*(1+1.08)/(0.12-0.08)=4.45/0.04= 111.26
Price of stock 2 years from now $111.26, now we need to discount it to the present value. 111.26/1.12^2=88.69
Best estimate = b. $89.87
Explanation:
