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need help with this dividend growth model please and thank you Dalton Detail (DD) is expected to experience nonconstant growth of 30% for the next
need help with this dividend growth model please and thank you
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 Detail's 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=$1.15D1=D0(1+g)=$1.15(1+0.30)=$1.4950D2=D1(1+g)=$(1.30)=$D3=D2(1+g)=$1.9435(1.30)=$2.5266 **** After D3 has been paid at Time 3, the stock becomes a constant growth stock (g=8%). Calculate the expected dividend at the end of the first year of constant growth that will be used later to calculate the stock price. D4=D3(1+g)=$(1.08)=$2.7287 Discount the expected dividends during the nonconstant growth period at the investor's required rate of return (R=13.4%) to find their present value. Year: Dividend: Calculate the expected stock price at the end of the final year of nonconstant growth. This is the Horizon Value and occurs at the horizon date; which is the end of Year 3. Use the Gordon model for this calculation. P^3=rsgD4= Then discount this stock price back 3 periods at the investor's required rate of return (Is) to find its present value. PVN=DN+1/(1+R)N=$/(1.134)3=$/(1.134)=$ Bringing it all Together: Add the present value of the stock price expected at the end of Year 3 plus the dividends expected in Years 1,2, and 3 to find the present value of the stock, P0. (Note that we are only concerned with future dividends and do not add D0.) Year: Dividend: Note that D3 and P3 are both discounted by (1+g)3 They represent the same time period same subscript $ same discount. Therefore $3.0576/(1.134)3=$36.3838 Step by Step Solution
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