Chapter 8 - Master it! In practice, the use of the dividend discount model is refined from the method we presented in the textbook. Many analysts will estimate the dividend for the next Suppose you find the following information about a particular stock: $ Current dividend: 5-year dividend growth rate: Perpetual growth rate: Required return: 5.40 9.5% 4.0% 11.0% a. Assume that the perpetual growth rate begins 10 years from now and use linear interpolation between the high growth rate and perpetual growth rate. Construct b. How sensitive is the current stock price to changes in the perpetual growth rate? Graph the current stock price against the perpetual growth rate in 10 years to Instead of applying the constant dividend growth model to find the stock price in the future, analysts will often combine the dividend discount method with price Payout ratio: Forward PE ratio at constant growth rate: 25% 15 c. Use the forward PE ratio to calculate the stock price when the company reaches a perpetual growth rate in dividends. Now, find the value of the stock today by d. How sensitive is the current stock price to changes in the PE ratio when the stock reaches the perpetual growth rate? Graph the current stock price against the The dividend growth rates, dividends, and stock prices are: 1 2 3 5 6 7 8 9 10 11 Year Dividend growth: Dividend: Price at Year 10: Price today: To graph the stock price for different growth rates, we need to calculate the price for various growth rates. Using a one-way data table, we get the following: Stock price Growth rate 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% The earnings and price in year 10 will be: Year 10 PE ratio: Year 11 earnings: Year 10 price: So, the stock price today with this valuation method is: Price today: Using a one-way data table, we find that the stock price today at different PE ratios is: Stock price PE ratio 10.00 11.00 12.00 13.00 14.00 15.00 16.00 17.00 18.00 19.00 20.00 Chapter 8 - Master it! In practice, the use of the dividend discount model is refined from the method we presented in the textbook. Many analysts will estimate the dividend for the next Suppose you find the following information about a particular stock: $ Current dividend: 5-year dividend growth rate: Perpetual growth rate: Required return: 5.40 9.5% 4.0% 11.0% a. Assume that the perpetual growth rate begins 10 years from now and use linear interpolation between the high growth rate and perpetual growth rate. Construct b. How sensitive is the current stock price to changes in the perpetual growth rate? Graph the current stock price against the perpetual growth rate in 10 years to Instead of applying the constant dividend growth model to find the stock price in the future, analysts will often combine the dividend discount method with price Payout ratio: Forward PE ratio at constant growth rate: 25% 15 c. Use the forward PE ratio to calculate the stock price when the company reaches a perpetual growth rate in dividends. Now, find the value of the stock today by d. How sensitive is the current stock price to changes in the PE ratio when the stock reaches the perpetual growth rate? Graph the current stock price against the The dividend growth rates, dividends, and stock prices are: 1 2 3 5 6 7 8 9 10 11 Year Dividend growth: Dividend: Price at Year 10: Price today: To graph the stock price for different growth rates, we need to calculate the price for various growth rates. Using a one-way data table, we get the following: Stock price Growth rate 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% The earnings and price in year 10 will be: Year 10 PE ratio: Year 11 earnings: Year 10 price: So, the stock price today with this valuation method is: Price today: Using a one-way data table, we find that the stock price today at different PE ratios is: Stock price PE ratio 10.00 11.00 12.00 13.00 14.00 15.00 16.00 17.00 18.00 19.00 20.00
