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Nonconstant and Very High Dividend Growth

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1. Nonconstant Growth. Planned Obsolescence has a product that will be in vogue for 3 years, at which point the firm will close up shop and liquidate the assets. As a result, forecast dividends are DIV1 = $2, DIV2 = $2.50, and DIV3 = $18. What is the stock price if the discount rate is 12%?

2. Dividend Growth. Grandiose Growth has a dividend growth rate of 25%. The discount rate is 10%. The end-of-year dividend will be $2 per share.

a. What is the present value of the dividend to be paid in year 1? Year 2? Year 3?

b. Could anyone rationally expect this growth rate to continue indefinitely?

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Solution Summary

This solution illustrates how to compute a stock price based upon non-constant dividend growth and very high dividend growth, and discusses why extremely high dividend growth cannot persist over a long term.

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