Dalton Detail (DD) is expected to experience nonconstant growth of 30% for the next 3 years. However, beginning with the fourth year, Dalton Detail should attain an 8% growth rate that it will sustain thereafter. The most recent dividend (D0) was $1.15 per share. Investors require a 13.4% rate of return on Dalton Details stock (which is used to discount cash flows).

What is the current equilibrium stock price? P0

To calculate the current value of a nonconstant growth stock, follow these steps:

1. Determine the expected stream of dividends during the nonconstant growth period. The dividends for this stock are predicted to grow at a steady 30%, (i.e. g=30%).

D0 = $1.15

D1 = D0(1 + g) = $1.15 (1 + 0.30) = $1.4950

D2 = D1(1 + g) = $1.495 (1.30) = $1.9435

D3 = D2(1 + g) = $1.9435 (1.30) = $2.5266

****After D3 has been paid at Time 3, the stock becomes a constant growth stock (g=8%). Calculate the expected dividend at the end of the first year of constant growth that will be used later to calculate the stock price.

D4 = D3(1 + g) = $2.5266 (1.08) = $2.7287

2. Discount the expected dividends during the nonconstant growth period at the investors required rate of return (R=13.4%) to find their present value.

R = 13.4%

Year: 0 1 2 3

| | | |

Dividend: D1 = 1.4950 D2 = 1.9435 D3 = 2.5266

1. 1.3183 2. 1.5113 3. 1.7326 total = 4.5622

3. Calculate the expected stock price at the end of the final year of nonconstant growth. This is the Horizon Value and occurs at the horizon date; which is the end of Year 3. Use the Gordon model for this calculation.

Then discount this stock price back 3 periods at the investors required rate of return (rs) to find its present value.

PVN = DN+1 / (1+ R)N = $ ------ / (1.134)3 = $ -------- /(1.134) = $---------

Please only answer question 3