A stock just paid an annual dividend of $2.50 per share yesterday (assume the stock pays dividends once per year). You project that the stock’s 3-year growth rate in dividends will be 8% per year (applies to the dividend one year from now, 2 years from now, and 3 years from now). Then, starting 4 years from now, you expect that the dividend will be 3.5% larger than its prior year dividend level, with this annual growth rate of 3.5% to continue forever. The effective annual discount rate for this stock is 8.5% per annum.
--Based on a dividend discount model, what do you estimate as the fair market value for this stock?
--Starting at year 4, how much do you expect the stock price to appreciate every year?