The Robert Phillips Co. currently pays no dividend. The company is anticipating dividends of $0, $0, $0, $.10, $.20, and $.30 over the next 6 years, respectively. After that, the company anticipates increasing the dividend by 4% annually. The first step in computing the value of this stock today, is to compute the value of the stock in year:

Question

Quizplus · Accepted Answer

The value of the stock in year 6 needs to be computed first because it is the last year before the dividends start growing at a constant rate (4% annually). From year 7 onwards, the dividend growth model can be applied to calculate the stock's value based on the constant growth rate.