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Leone and Sons Pickle Co. will pay its first annual dividend of $2 later today. Subsequent dividends will grow by 10% per year for the next three years, and then by 4% per year for each year after that. Find the present value of this stock, given an effective annual rate of 8%

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Answer:

P₀ = $61.17

Explanation:

Div₀ = $2

Div₁ = $2.20

Div₂ = $2.42

Div₃ = $2.662

Div₄ = $2.76848

terminal value at year 3 = $2.76848 / (8% - 4%) = $69.212

P₀ = $2.20/1.08 + $2.42/1.08² + $2.662/1.08³ + $69.212/1.08³ = $2.037 + $2.075 + $2.113 + $54.943 = $61.168 ≈ $61.17

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