Consider a share of stock that pays a dividend of $1 at the end of one year, $2 at the end of two
years, and then dividends grow at a constant rate of 5% per year thereafter. If the required return is
10%, we can value this share of stock by ﬁnding P₂ using D₃, then ﬁnd P₀ = D₁/(1.1) + D₂/(1.1)² +
P₂/(1.1)¹. In this formula, it appears as though we ignore all dividends from year three on. Why is this
so?

Question

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The Answer of Consider a share of stock that pays a dividend of $1 at the end of one year, $2 at the end of two years, and then dividends grow at a constant rate of 5% per year thereafter. If the required return is 10%, we can value this share of stock by ﬁnding P₂ using D₃, then ﬁnd P₀ = D₁/(1.1) + D₂/(1.1)² + P₂/(1.1)¹. In this formula, it appears as though we ignore all dividends from year three on. Why is this so?

Consider a Share of Stock That Pays a Dividend of $1