Question
Asked Mar 25, 2020
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Babbalu Inc. just paid a dividend of $1 per share. Babbalu expects to increase its annual dividend by 20% per year for the next two years and by 15% per year for the following two years. Starting in year 5, Babbalu is expects to pay a constant annual dividend of $3 a share. What is the current value of this stock if the required rate of return is 12%?

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Expert Answer

Introduction

Current value of share can be calculated by computing the present value of all the future dividends.

Present value of future dividends/current market price can be calculated by using the following formula:

Finance homework question answer, step 1, image 1

Here, 

Current dividend is "D0"

Growth rate is "g"

Requir...

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