59. Refer to Exhibit 8.4. The price of the stock today

(P0) is

Exhibit 8.4 The Two-Stage DDM (Using the Constant Growth DDM for the Terminal Value) Here, we examine Cisco Systems (CSCO) in 2000 (the height of the technology bubble). Assume that CSCO had a 53 cent dividend in 2000 (even though 53 cents was actually CSCO's earnings). Imagine that you thought that CSCO would grow their dividends-per-share at 20% per year for five years and then growth would subside to 5% and that would be their long-term growth rate. We could build a two-stage model that would capture both the high growth and then the constant growth. The cost of equity is 12%. 2001 2002 2003 2004 2005 2006 Dividend $ 0.64 $0.76 $0.92 $1.10 $ 1.32 $1.38 Terminal Value $19.78 PV of Dividend $ 0.57 $0.61 PV of Terminal Value $0.65 $0.70 $ 0.75 $11.22 Value of Stock $14.50 For the first five years (2001-2005), we grew the 53 cent dividend by 20% per year. In 2006, growth slowed to 5%. The 2006 dividend was used to calculate the terminal value in 2005. Think of this as saying that the stock will be worth $19.78 in 2005. This is $1.38/ (.12 - .05). Then, all of the dividends and the terminal value were discounted to the present