Problem 8-25 Two-Stage Dividend Growth Model [LO1] Navel County Choppers Inc. is

Question

Problem 8-25 Two-Stage Dividend Growth Model [LO1]

Navel County Choppers Inc. is experiencing rapid growth. The company expects dividends to grow at 17 percent per year for the next 14 years before leveling off at 5 percent into perpetuity. The required return on the company’s stock is 13 percent. If the dividend per share just paid was $1.67, what is the stock price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Navel County Choppers Inc. is experiencing rapid growth. The company expects dividends to grow at 17 percent per year for the next 14 years before leveling off at 5 percent into perpetuity. The required return on the company’s stock is 13 percent. If the dividend per share just paid was $1.67, what is the stock price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Explanation / Answer

Use the dividends as cash flow and calculate the present value of future cash flows As per the dividend growth model Price of stock = [Dividend*(1+g1)^t/(1+R)^t] + [(Dividend in year 15/(R -g2))/(1+R)^14] t is the time period from 1 to 14 g1 = .17 R = .13 g2 = .05 Dividend in year 15 = 1.67*(1+g1)^14*(1+g2) Dividend in year 15 = 1.67*(1+.17)^14*(1+.05) Dividend in year 15 = 15.79 Present value = Future cash flow/(1+R)^t Year 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 cash flow 1.9539 2.2861 2.6747 3.1294 3.6614 4.2838 5.0121 5.8641 6.8610 8.0274 9.3921 10.9887 12.8568 15.0424 197.375 present value of future cash flows 1.7291 1.7903 1.8537 1.9193 1.9873 2.0576 2.1304 2.2058 2.2839 2.3648 2.4485 2.5352 2.6249 2.7178 35.66103 Sum of present values of future cash flows 66.3097 The stock price is $66.31

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