1. Nonconstant Growth Valuation (Formula Approach)

Consider the following scenario: The last dividend the company paid was D0=$1D0=$1. The rate of growth in both earnings and dividends during the 3-year nonconstant growth period is gs=8%gs=8%, the normal growth rate after the nonconstant period, i.e., starting at the end of year three and in the future is gn=4%gn=4%, and the required (minimum acceptable) rate of return on the stock is rs=7%rs=7%.

What is the formula for the stocks intrinsic value in this case?

Suppose that the firm recently paid a dividend D0=$2.20D0=$2.20. It expects to have nonconstant growth of gs=8%gs=8% for 2 years and then a constant rate of gn=6%gn=6% thereafter. The firms required return is rs=7%rs=7%.

According to the problem walk-through video, what is the formula for the terminal, or continuing value, at the end of year 2?

According to the problem walk-through video, what is the formula for the firms intrinsic value today?

P0=D1(1+rs)1+D2(1+rs)2+P2P0=D11+rs1+D21+rs2+P2

P0=D1(1+rs)1+D2(1+rs)2+P2(1+rs)2P0=D11+rs1+D21+rs2+P21+rs2

P0=D1(1+rs)1+D2(1+rs)2+D3(1+rs)3+P2(1+rs)2P0=D11+rs1+D21+rs2+D31+rs3+P21+rs2

P0=P2(1+rs)2P0=P21+rs2

Dividend	Value
D1D1
D2D2
D3D3

The firms horizon value is .

The firms intrinsic value is .

Step 3: Practice: Nonconstant G