Question

10. Your task is to value a share of Supernormal Corp. stock using a required return of 10%/yr. The stock is expected to pay a dividend of $1.20 one year from now. Dividends are then expected to grow by 15%/yr. for two years. The growth rate is expected to drop to 12%/yr. for the next three years. After that, the growth is expected to be stable at 3%/yr. forever.

Answer 1

We will use Gordon's Multiperiod Divideod Discount model to solve this question. Lets first calulate the dividend streams over the next few years as below Year Dividend (8) oli 21 31 41 5167 D 1.20 1.38 1.587 1.777 1.991/2.23 2.30 Calculations for dividinds shown below: D = $1.2 De - $ 1.2 x 1 1+15).) - $1.38 Dz = $1.38x (+15%) = $1.587 Dy - $1.587 x (1+12%.) = $1.777 Ds - $ 1.777 4 (1 + 12.) = $1.991 D = $ 1.9918 (1 + 12.1.) = $2.23 Dr = $2.23 x 11 + 3%) = $2.30 Since dividends wontinue to grow at a constant rate of 3% after year 6, we can calculate the man value at year 6 of those dividend streams using dividend discount model P = De rrg where r is required return of 10.). and g = 3%

$2.30 1097. - 32 $ 32.8) $2.30 7) = Current Valuee can be cal inlated by discounting the various cash flow strearus (including P) as follows V. & D. & D. Dur Pb Vo = 1.2 1.38 & 1.587 (1+10%)' 1 +10-9.) 11-10-1,93 1.777 & 1.99) 2.23+32-81 (17107.)? 117104)5 (1710%.)" - 1.09 + 1.14 7 1.19 + )-23 + 1.24 + 19.78 = $25.65 of Hence, the value of a share Supercormal Coup is $25.65