Mountain Top Nursery is a relatively young firm which just paid its first annual dividend of $0.25 a share. Management projects dividend increases of 10 percent per year for five years followed by a constant growth rate of 3.0 percent annually. What is this stock worth today if the applicable discount rate is 12.5 percent?

Question

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The correct answer is A because the stock is worth $3.59 today. The dividend is expected to grow at 10% for the next five years, and then at 3% thereafter. The discount rate is 12.5%.

Mountain Top Nursery Is a Relatively Young Firm Which Just