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 equity today, is
To compute the value of the share when it reaches constant growth in year:

Question

Quizplus · Accepted Answer

To compute the value of the share when it reaches constant growth, we need to calculate the present value of all future dividends until that point. Since the company is anticipating dividends for the next 6 years, we need to calculate the present value of these 6 dividends first. Then, we need to calculate the present value of the dividend that grows at a constant rate beyond year 6. This requires us to use the formula for the present value of a growing perpetuity. Therefore, the year in which the company reaches constant growth is year 6, which is option D.