DIVIDEND GROWTH MODEL

The dividend growth model calculates the present value (PV) of future dividends by using the current dividend as the starting point (Do) and applying the growth rate (g) and the required rate of return (R). It does not calculate the PV of one year's growth by applying the growth rate of the following year. The model assumes that dividends will continue to grow at a constant rate indefinitely.

4. Fernwell wants to buy shares of Gurst Co in two years. Fernwell uses the dividend valuation model with orname dividend growth rate of 5% If Fernwell's discount rate is 10% and Gurst has recently paid a dividend of $20 per share, what is the price per share that Fernwell will pay? A. $400 B. $420 C. $441 D. $463 But sir in this question by calculating the second year value of the share we applied 3 rd year growth and the discounted by using dividend growth model

mv(xd) = div(yr1) / ( ke-g) So The dividend is 20 * 1.05 But they want to buy shares of Gurst Co in two years therefore its 20*1.05 (1.05)(1.05) or 20 * 1.05^3 div by (0.10 - 0.05)