Company A has just paid a dividend (D₀) of $1.50. The following are forecasted growth rates:

Year 1 100%

Year 2 50%

Year 3 25%

Year 4 10%

Year 5 5%

Year 6 and on -2% (Note: The constant growth rate here is negative 2%, not 2%.) The firm’s cost of equity is 11% (i.e. investors require a 10% return on this stock).

1. Calculate the expected dividends for years 1 through 5. (Round all dividends to the nearest cent.)

Calculate the expected stock price at the end of year 5, P₅ (round to the nearest cent.)

(Note: P₅ represents the value of all dividends in years 6 through infinity as of five years from today. The constant growth rate starts at the end of Year 5. That is why the expected price we are solving for is P5. You need to calculate D6 first before using the Constant Growth Model. Again, note that the constant growth rate is -2%, not 2%.)