Answer:
The stock is worth $17.50 per share today
Explanation:
The price per share today can be calculated using the DDM where expected dividends are discounted back to present value to calculate the share price. When the dividend growth becomes zero, we will calculate the terminal value at the end of Year 3 and discount it back too. The formula for price of the stock today is,
P0 = D1 / (1+r) + D2 / (1+r)^2 + D3 / (1+r)^3 + [ (D4 / r) / (1+r)^3]
P0 = 1.45 / (1+0.09) + 1.5 / (1+0.09)^2 + 1.53 / (1+0.09)^3 +
[ (1.6 / 0.09) / (1+0.09)^3]
P0 = $17.50
