medium · Principles of Finance

In a two-stage DDM, if n = 3, g_1 = 15%, g_2 = 5%, and r = 10%, what is the price of the stock expected to be at the end of year 1 (P_1)?

1. The dividend in year 2 divided by the cost of equity.
2. The same as the current intrinsic value (P_0).
3. The terminal value (TV_3) plus the year 1 dividend.
4. The present value of all dividends from year 2 onwards, discounted back to year 1.

Sign up free to see the explanation and track your rank →