3. Use constant growth model to do the problem. If D_(0)= 5 per share g=10% .R=15% (21 poi i) Calculate D_(2) ii) Calculate P_(0)

To solve this problem using the constant growth model, we can use the Gordon Growth Model (GGM), which is a method used to determine the present value of a stock with constant growth in dividends.<br /><br />Given:<br />- $D_0 = \$5$ per share<br />- $g = 10\%$<br />- $R = 15\%$<br /><br />i) Calculate $D_2$:<br />To calculate $D_2$, we need to apply the growth rate to the initial dividend $D_0$ for two periods (since $D_2$ is two periods ahead of $D_0$).<br /><br />$D_2 = D_0 \times (1 + g)^2$<br /><br />$D_2 = \$5 \times (1 + 0.10)^2$<br /><br />$D_2 = \$5 \times 1.21$<br /><br />$D_2 = \$6.05$<br /><br />Therefore, $D_2$ is \$6.05 per share.<br /><br />ii) Calculate $P_0$:<br />To calculate the current stock price $P_0$, we use the Gordon Growth Model formula:<br /><br />$P_0 = \frac{D_1}{R - g}$<br /><br />First, we need to calculate $D_1$, which is the dividend expected next year. Since $D_1$ is one period ahead of $D_0$, we apply the growth rate to $D_0$:<br /><br />$D_1 = D_0 \times (1 + g)$<br /><br />$D_1 = \$5 \times (1 + 0.10)$<br /><br />$D_1 = \$5.50$<br /><br />Now, we can calculate $P_0$:<br /><br />$P_0 = \frac{\$5.50}{0.15 - 0.10}$<br /><br />$P_0 = \frac{\$5.50}{0.05}$<br /><br />$P_0 = \$110$<br /><br />Therefore, the current stock price $P_0$ is \$110.