A company currently has earnings (E0) of $3.00 and a dividend (D0) of $1.25. The firms current return on equity (ROE) is 40%. The firm will maintain the same dividend payout and ROE over the next two periods. Then it will transition in a linear reduction in years 3, 4, and 5 to a growth of 2%. The firm will then grow at 2% to perpetuity. The firms beta is presently 1.4, but this will transition to 1 over the same period. The risk-free rate is 4% and the market risk premium is 6%. ROE is expected to be 5% beginning in year 5 to perpetuity. What is the present value of this firms equity using a three-stage model with linear transition in years 3, 4, and 5?

Model

Description/Year	0	1	2	3	4	5
Earnings Growth Rate						2.00%
EPS	$ 3.00
Dividend payout (DPS/EPS)			41.67%
Dividends per share (DPS)	$ 1.25
Cost of capital (Ke)						10.00%
Present value of cash flows