The Cost of Equity in the Nonconstant Dividend Growth Model APPLICATION OF THE DISCOUNTED CASH FLOW APPROACH WHEN GROWTH IS NOT CONSTANT Analysts often provide non-constant estimates of future growth. We can use a modification of the discounted cash flow valuation procedure for non-constant growth from Tutorial 8 to estimate the cost of equity PROBLEM Suppose the current dividend is $2.16 per share and the current actual price that we observe is $32.00 per share. Analysts forecast growth of 11 percent the first year, 10 percent the second year, 9 percent the third year, 8 percent the fourth year, and 7 percent thereafter. Estimate the cost of equity Step 1: Create a time-line showing the expected future dividend payments. These are based on the current dividend and the estimated growth rates Year Growth Dividend 0 3 996 2.87 4 8% 3.10 5 7% 3.32 11% 10% 2.16 2.40 2.64 Step 2: The Cost of Equity in the Nonconstant Dividend Growth Model APPLICATION OF THE DISCOUNTED CASH FLOW APPROACH WHEN GROWTH IS NOT CONSTANT Analysts often provide non-constant estimates of future growth. We can use a modification of the discounted cash flow valuation procedure for non-constant growth from Tutorial 8 to estimate the cost of equity PROBLEM Suppose the current dividend is $2.16 per share and the current actual price that we observe is $32.00 per share. Analysts forecast growth of 11 percent the first year, 10 percent the second year, 9 percent the third year, 8 percent the fourth year, and 7 percent thereafter. Estimate the cost of equity Step 1: Create a time-line showing the expected future dividend payments. These are based on the current dividend and the estimated growth rates Year Growth Dividend 0 3 996 2.87 4 8% 3.10 5 7% 3.32 11% 10% 2.16 2.40 2.64 Step 2