Answer on Finance Question for TARA
(Assume dividends grow at the same rate as earnings after year 4.)
The present value of a stock with constant growth is one of the formulas used in the dividend discount model, specifically relating to stocks that the theory assumes will grow perpetually. The dividend discount model is one method used for valuing stocks based on the present value of future cash flows, or earnings.
P4 = 1/(0.20-0.05) = P(t0) = 1*(1.3/1.2)^4 + (6.67+1)/1.2 = $7.77
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