Question

A company issued a dividend of $1.00 (Do) this year, which is expected to grow at 15% per year for the next 2 years and 5% per year thereafter. The required rate of return is 15% per year. Use the two-growth dividend discount model to complete the following table. Item Value N $1.00 4 4 4 4

Answer 1

D₁ = D₀(1+g)

= 1 (1+0.15)

D₁ = 1.15

D₂ = D₁(1+g)

= 1.15 (1+0.15)

D₂ = 1.3225

D₃ = D₂(1+g)

= 1.3225 (1+0.05)

D₃ = 1.3886

P₃ = D₄/(k - g) or D₃(1+g) / (k-g)

= 1.3886(1.05) / (0.15-0.05)

P₃ = $ 14.58

P₀ = D₁/(1+k) + D₂/(1+k)² + D₃/(1+k)³ + P₃/(1+k)³

= 1.15/(1.15) + 1.3225/(1.15)² + 1.3886/(1.15)³ + 14.58/(1.15)³

P₀ = $12.50