*Consider a stock with dividends that are expected to grow at 20% per year for four years, after which they are expected to grow at 5% per year, indefinitely. The last dividend paid was $ 1 .00, and k = 10%. Calculate the value of this stock using the__multistage growth model.* Okay, so I calculated that in years 1 2 3 4, the dividends are as follows D1 = 1.20. That’s the dividend after 12 months D2 = 1.44 D3 = 1.73 D4 = 2.08 Using the Gordon Growth model with the newly reduced dividend growth rate going forward, we find that 2.08/(0.10-

**0.05**) gives us a value of $41.60. The book states that P

**3**= $41.60. Why isn’t it P

**4**? It isn’t until the end of the 4th year/beginning of the 5th year that we see a change in dividend growth rates? Obviously we have to discount the first 3 dividends based on a 20% growth rate. Discounted D1 = 1.2/(1.1) Discounted D2 = 1.44/(1.1^2) Discounted D3 = 1.73/(1.1^3) Now comes the tricky part. The book adamently states that we are to divide the $41.60 value by 1.1^

**3.**Why is that, when it had 4 years to grow? The answer given is 1.09 + 1.19 + 1.30 +

**31.25**= 34.83