Non-constant Growth Stock The last dividend paid by Company A was $2.20. Its growth rate is...

Non-constant Growth Stock

The last dividend paid by Company A was $2.20. Its growth rate is expected to be 10 percent for three years, after which dividends are expected to grow at a rate of 6 percent forever. The company’s stockholders require a rate of return on equity of 11.5 percent.

a. Draw a clear and accurate timeline of the expected cash flows. (The timeline should consist of time periods (t = 0, 1, 2, . . .), the cash flow asso- ciated with each period, the dividend growth rate(s) and the discount rate.)

b. What is P0, the current price of the stock? ˆ

c. What is P1, the expected price of the stock a year later at t = 1?

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