T8.14 Solution to Problem 8.10 (concluded)
This share of stock represents a stream of cash flows with two important features:
First, because they are expected to grow at a constant rate (once they begin), they are a growing perpetuity;
Second, since the first cash flow is at time 6, the perpetuity is a deferred cash flow stream.
Therefore, the answer requires two steps:
1. By the constant-growth model, D6/(r - g) = P5;
i.e., P5 = $6.00/(.23 - .05) = $______.
2. And, P0 = P5 ??1/(1 + .23)5 = $33.33 ? .3552 = $11.84.