Answer to Question #206358 in Economics for Siyamthanda

Question

Bokke’s management anticipates that, after five years of paying a constant 

dividend of R2 per year, they will be able to secure new markets. Management 

thus feels that, commencing with the dividend in year 6, dividends should grow 

at a rate of 20% per annum for two years (i.e., in years 6 and 7); then there 

should be 18% growth for one year (i.e., in year 8), settling down thereafter to 

a constant growth of 10% per annum indefinitely. The required return has 

increased to 20% per annum.Calculate the price of Bokke’s shares today

Answer 1

$$2\times1.2^2\times1.18\times1.1^{10}=8.81$$