Supernormal Growth Model Severn$-$Day Practice Package

Firm $A$ is expected to pay $$2$ dividend next year. The dividend will then grow by $10\%$ for another two years. After that, the dividend growth rate will decrease to $5\%$ and last forever. How much would you like to pay for this stock if your required rate of return is $7\%?$

Firm B just paid a dividend of $$1\mathrm{.}6.$ The dividend will grow by $3\%$ for one year and $5\%$ for another three years. After that, the dividend growth rate will increase to $10\%$ and last forever. How much would you like to pay for this stock if your required rate of return is $12\%?$

Firm $C$ just paid a dividend of $$1.$ The dividend will grow by $6\%$ for two years and $8\%$ for another two years. After that, the dividend will be constant forever. How much would you like to pay for this stock if your required rate of return is $10\%?$

Firm $D$ is expected to pay $$1$ dividend in one year. This $$1$ dividend will keep constant for another three years and then grow by $5\%$ forever. How much would you like to pay for this stock if your required rate of return is $10\%?$

Firm $E$ is expected to pay $$3$ dividend in one year. This $$3$ dividend will keep constant for another two years and then grow by $5\%$ for three years. After that, the dividend will grow by $2\%$ forever. How much would you like to pay for this stock if your required rate of return is $6\%?$

Firm $F$ is expected to pay $$1\mathrm{.}8$ dividend in one year. This $$1\mathrm{.}8$ dividend will keep constant for another two years and then grow by $20\%$ for three years. After that, the dividend will keep constant again. How much would you like to pay for this stock if your required rate of return is $9\%?$

Day $1$: Draw Timelines with Growth Rate Indicated

Day $1$: Draw Timelines with Growth Rate Indicated

Firm A:

Firm B:

Firm C:

Firm D:

Firm E:

Firm F:

Day $2$: Calculate Dividend Each Year Think: Where to stop your calculation.

Firm A:

Firm B:

Firm C:

Firm D:

Firm E:

Firm F:

Day $3$: Draw Timeline with Dividend Shown at the End of Each Year

Firm A:

Firm B:

Firm C:

Firm D:

Firm E:

Firm F:

Day $4$: Calculate Horizon Value

Firm A:

Firm B:

Firm C:

Firm D:

Firm E:

Firm F:

Day $5$: Draw Timeline with Finite End and Dividend Indicated

Firm A:

Firm B:

Firm C:

Firm D:

Firm E:

Firm F:

Day $6$: Uneven Cash Flow Calculation

Firm A:

Firm B:

Firm C:

Firm D:

Firm E:

Firm F:

Day $7$: Review

Review all your work in the past $6$ days AND solve the following questions:

Firm XYZ just paid a dividend of $$1\mathrm{.}9.$ The dividend will grow by $5\%$ for two years and $8\%$ for another three years. After that, the dividend growth rate will decrease to $3\%$ and last forever. How much would you like to pay for this stock if your required rate of return is $9\%?$

Firm ABC is expected to pay $$2$ dividend in one year. This $$2$ dividend will keep constant for another three years and then grow by $5\mathrm{.}8\%$ for three years. After that, the dividend will keep constant again. How much would you like to pay for this stock if your required rate of return is $6\%?$

Firm JFK is expected to pay $$2\mathrm{.}8$ dividend in one year. This $$2\mathrm{.}8$ dividend will keep constant for another four years and then grow by $4\mathrm{.}2\%$ for three years. After that, the dividend will grow by $3\mathrm{.}9\%$ forever. How much would you like to pay for this stock if your required rate of return is $7\mathrm{.}6\%?$