Answer:
E: 6.34
Explanation:
First we solve for the PV of the next years dividends using the lump sum PV formula:
rate = 12%
Total of 5.8869
Then, this with the PV of the future dividends usign the gordon model should match 40 dollars.
so the PV of the indefinite sum of dividends should be: 40 - 5.8869 = 34.1131
\frac{Dividends_1}{return - growth} = Value
This is four years into the future thus, we discount as well for the rate of return We want ot knwo the value at the fourth year to solve for the grow rate:
34.1131 x 1.12^4 = 53.67762328
Now the formual for the gordon model requires next year dividends thus D0 x 1 + g and we don't know g so we have to operate to solve it:
The correct answer would be E