Can someone check this? QBank issue calculator, following, expected

prashantsahni

When I plug in these inputs in my calculator I’m not getting the same answer. Can someone check on this and let me know if it’s just me making a mistake or if the QBank is wrong?
The following data pertains to a common stock:
It will pay no dividends for two years.
The dividend three years from now is expected to be $1.
Dividends are expected to grow at a 7% rate from that point onward.
If an investor requires a 17% return on this stock, what will they be willing to pay for this stock now?
A) $ 7.30.
B) $10.00.
C) $ 6.24.
Your answer: A was correct!
time line = $0 now; $0 in yr 1; $0 in yr 2; $1 in yr 3.
P2 = D3/(k  g) = 1/(.17  .07) = $10
Note the math. The price is always one year before the dividend date.
Solve for the PV of $10 to be received in two years.
FV = 10; n = 2; i = 17; compute PV = $7.30

dkishore1

I get it that way, I’m having trouble with the explanation where they say FV = 10; n = 2; i = 17; compute PV = $7.30. I’m getting 8.89, not 7.30. This could be a result of trying to study at my girlfriend’s house while everyone else is prepping for Thanksgiving…
Thanks cfagoal2

Flok

Confirm answer is correct.
Alternative calculation:
P3 = D3*(1+g)/(kg) + D3 = 10.7 +1 = 11.7
Discount it back 3 years 11.7 (1.17^3) = 7.31