Example: The Hatfield & McCoy Companys dividend is expected to grow at 20% for the next five years. After that, the growth is expected to be 4% forever. If the required return is 10%, what is the value of the stock? The dividend just paid was $2.00. Solution: Step 1: Label all the variables you are given. Step 2: Draw a timeline and label the cash flows: Step 3: Find the (terminal) value of the stock when it becomes a growing perpetuity. This is equivalent to solving for : = +1 2 = 0(1+1)(1+2) 2 Chauncey G. Joyce Page 16 Stock Valuation Two-stage Growth (Approach 2) Step 4 (Approach 2A): Discount each relevant cash flows (by using the single cash flow time value of money equation) Step 4 (Approach 2B): Discount each relevant cash flows (by using