Stock Valuation with Non-constant Growth of the Dividend using DDM. The last ann

Question

Stock Valuation with Non-constant Growth of the Dividend using DDM. The last annual dividend paid by Starboard Industries was Do = $1.15. The company's growth rate is expected to be 30 percent for each of the next 3 years, followed by a constant rate of 8 percent, indefinitely. Investors require a return of Ri = 13.4 percent. What is the expected annual dividend for each of the next three years, respectively? (Hint: this question is asking for Future, Uneven Cash Flows)

For the situation described above, what is the dividend in year 4 that is used to determine the horizon value or terminal value of the stock in three years, P3?

Explanation / Answer

Answer:D0= $1.15

D1=D0(1+g)

=$1.15(1+30%)=$1.495

D2=$1.495 (1+0.30)=$1.9435

D3=$1.9435(1+0.30)=$2.52655

D4=$2.52655(1+0.08)=$2.728674

P3=D4/(K-g)

=$2.728674/(0.134-0.08)

=50.531

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