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 16 percent per year for the next 8 years before leveling off at 6 percent into perpetuity. The required return on the company’s stock is 15 percent. If the dividend per share just paid was $2.12, what is the stock price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Stock price

$

Answer 1

Stock Price is equal to the present value of all future dividends

Year	Dividend	Present value factor	Present value
1	2.4592	0.869565217	2.138434783
2	2.852672	0.756143667	2.157029868
3	3.30909952	0.657516232	2.175786649
4	3.838555443	0.571753246	2.194706533
5	4.452724314	0.497176735	2.213790938
6	5.165160204	0.432327596	2.233041294
7	5.991585837	0.37593704	2.252459044
8	6.950239571	0.326901774	2.272045644
Terminal Value	81.85837717	0.326901774	26.7596487
		Value	44.39694345

Hence, Stock Price = $44.4

Α 1 Year 2 1 3 2 4 3 5 4 65 7 6 8 7 98 10 Terminal Value 11 Dividend =2.12*1.16 =B2*1.16 =B3*1.16 =B4*1.16 =B5*1.16 =B6*1.16 =B7*1.16 =B8*1.16 =B9*1.06/0.09 Present value factor =1/1.15 =C2/1.15 =C3/1.15 =C4/1.15 =C5/1.15 =C6/1.15 =C7/1.15 =C8/1.15 =C9 Value Present value =B2*C2 =B3*C3 =B4*C4 =B5*C5 =B6*C6 =B7*C7 =B8*C8 =B9*C9 =B10*C10 =SUM(D2:010)