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Your analysis of Yoyodyne Inc. suggests that for the next 4 years, the company will experience...

Your analysis of Yoyodyne Inc. suggests that for the next 4 years, the company will experience an above average dividend growth rate of 1.8%. After that time, the dividend growth rate will fall to its historical average level of 1.4% and remain there indefinitely. If the company just paid a dividend of $1.20 and you require a return of 6.4%, what should current stock price be if it follows the constant growth dividend model?

-please show work using formulas by hand. we cannot use excell on exam. thanks!

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Answer #1

Calculating Value of Stock by discounting dividends of 4 years, and using DDM model after that,

Value of Stock Today = 1.20((1.08)/(1.064)) + 1.20((1.08)/(1.064))2 +1.20((1.08)/(1.064))3 + 1.20((1.08)/(1.064))4 + 1.20(1.08)4(1.014)/(0.064 - 0.014)

Value of Stock Today = 1.218 + 1.236 + 1.255 + 1.274 + 33.108

Value of Stock Today = 38.091

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