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GXG Co could suspend dividends for two years, and then pay dividends of 25 cents per share from the end of the third year, increasing dividends annually by 4% per year in subsequent years. Dividends in recent years have grown by 3% per year. Cost of equity is 9 %.
I calculated the share price in 2 years like this; (0.25*1.04)/(0.09-0.04)= $ 5.20.
In the answer the growth has not been taking into account. Why is that ?
I remember watching your lecture in which the growth was taken into account. It was example 7 of chapter 15.The formula assumes that the first dividend is in 1 years time, and the numerator ( Do(1+g)) is the dividend in 1 years time.
Here, the first dividend is in 3 years time and is an actual 25c (not 25c(1.04)).
So the share price in 2 years is 25/(0.09 – 0.04).
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