Answer:
Best estimate of the current stock price= $42.64
Explanation:
Price of the stock today = [tex]\frac{D1}{(1+ke)^1}+\frac{D2}{(1+ke)^2}+\frac{P2}{(1+ke)^2}[/tex].
where P2 = [tex] \frac{D3}{ke-g}[/tex]
D0=$1.75
D1=$1.75(1.25)
D2=$1.75(1.25)(1.25)
D3=$1.75(1.25)(1.25)(1.06)
Price of the stock today = [tex]\frac{1.75(1.25)}{(1+0.12)^1}+\frac{1.75(1.25)(1.25)}{(1+0.12)^2}+\frac{1.75(1.25)(1.25)(1.06)}{(0.12-0.06)(1+0.12)^2}[/tex]. = $42.64
