In the non-constant growth model where the first phase of growth is 5 years, followed by a second phase of constant growth:

Question

Quizplus · Accepted Answer

A) PS1U1B15S1U1B0 represents the present value of dividends in year 5, which can be calculated by dividing the dividends in year 6 (DS1U1B16S1U1B0) by the difference between the cost of equity (KS1U1B1) and the growth rate (g). This formula assumes that the second phase of growth starts in year 6.
B) This formula calculates the present value of dividends for the first 5 years, plus the present value of the stock price at the end of year 5, which is represented by PS1U1B15S1U1B0.
C) This is likely because the company is expected to experience higher growth during the initial phase, before settling into a more stable, constant growth pattern.
In summary, all of the given choices are correct.

In the Non-Constant Growth Model Where the First Phase of Growth