2-Stage Dividend Discount Model example with Gordon Growth Model formula

I got A as my answer.

• CF0 = 0
• CF1 = 0
• CF2 = 0
• CF3 = 0
• CF4 = 0
• CF5 = 1
• CF6 = 1*(1.25) = 1.25
• CF7 = 1*(1.25)² = 1.5625
• CF8 = 1*(1.25)³ = 1.953125
• CF9 = 42.68 (see explanation below)
• I = 10.3%
• NPV = $20.65

CF9 = dividend + price by Gordon Growth Model

Gordon Growth Model formula:

$P=\frac{D_1}{r–g}$

where

• P = price
• D₁= value of next year’s dividend
• r= required rate of return
• g=constant rate of growth

So calculating CF9

CF9 = dividend + price by Gordon Growth Model

$$\begin{gathered} =CF8\times 1.05+\left(\frac{CF8\times 1.{05}^2}{0.103–0.05}\right) \\ =1.953125\times 1.05+\left(\frac{1.953125\times 1.{05}^2}{0.053}\right) \\ =2.05+40.63 \\ =42.68 \end{gathered}$$