## Answers

Year | Dividend | PVF @20% | PV of dividend |

1 | 1.2 | 0.833 | 1 |

2 | 1.38 | 0.694 | 0.9583 |

PV | 1.9583 |

Dividend at the end of year 2 = 1.38* 105% = 1.449

Price after year 2 = Dividend / (Cost of equity - growth rate )

= 1.449 / (20% -5%)

=9.66

Present Value of year 2 Stock = 9.66 * 0.694 = 6.708

Fair value of the share = 6.708 + 1.9583 =$ 8.67

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