Questions: Multiple Choice Question Why do you have to use the dividend at time n+1 to compute the terminal price in the two-stage growth valuation model? O You don't. The dividend used to compute the terminal price should be the time n dividend. O The terminal price is the time n price. The dividend used to compute a price must always be one time period ahead of the price. O The terminal price is the time n+1 price. Thus, the dividend must be the time n+1 price.

Multiple Choice Question Why do you have to use the dividend at time n+1 to compute the terminal price in the two-stage growth valuation model? O You don't. The dividend used to compute the terminal price should be the time n dividend. O The terminal price is the time n price. The dividend used to compute a price must always be one time period ahead of the price. O The terminal price is the time n+1 price. Thus, the dividend must be the time n+1 price.
Transcript text: Multiple Choice Question Why do you have to use the dividend at time $n+1$ to compute the terminal price in the two-stage growth valuation model? O You don't. The dividend used to compute the terminal price should be the time $n$ dividend. O The terminal price is the time $n$ price. The dividend used to compute a price must always be one time period ahead of the price. O The terminal price is the time $n+1$ price. Thus, the dividend must be the time $n+1$ price.
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Solution

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The answer is the third one: The terminal price is the time \( n+1 \) price. Thus, the dividend must be the time \( n+1 \) price.

Explanation:

  1. "You don't. The dividend used to compute the terminal price should be the time \( n \) dividend." - This is incorrect because the terminal price calculation in the two-stage growth model requires the dividend at time \( n+1 \), not the dividend at time \( n \).

  2. "The terminal price is the time \( n \) price. The dividend used to compute a price must always be one time period ahead of the price." - This is incorrect because the terminal price is not the time \( n \) price; it is the price at time \( n+1 \).

  3. "The terminal price is the time \( n+1 \) price. Thus, the dividend must be the time \( n+1 \) price." - This is correct because in the two-stage growth valuation model, the terminal price is calculated at time \( n+1 \), and therefore, the dividend used in this calculation must be the dividend at time \( n+1 \).

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