Microsoft has just paid a dividend of $1 per share (this dividend is already paid sometimes called Dividend 0). It is estimated that the companys dividend will grow at a rate of 35% in year 1 and 20% in year 2. The dividend is then expected to grow at a constant rate of 1% thereafter. The companys opportunity cost of capital is 11% what is an estimate Microsofts stock using the nonconstant growth technique?
Required rate= | 11.00% | ||||||
Year | Previous year dividend | Dividend growth rate | Dividend current year | Horizon value | Total Value | Discount factor | Discounted value |
1 | 1 | 35.00% | 1.35 | 1.35 | 1.11 | 1.2162 | |
2 | 1.35 | 20.00% | 1.62 | 16.362 | 17.982 | 1.2321 | 14.59459 |
Long term growth rate (given)= | 1.00% | Value of Stock = | Sum of discounted value = | 15.81 | |||
Where | |||
Current dividend =Previous year dividend*(1+growth rate)^corresponding year | |||
Total value = Dividend + horizon value (only for last year) | |||
Horizon value = Dividend Current year 2 *(1+long term growth rate)/( Required rate-long term growth rate) | |||
Discount factor=(1+ Required rate)^corresponding period | |||
Discounted value=total value/discount factor |
Value of stock = PV of future cash flows
=PV of non constant growth dividends + PV of terminal value
=Current dividend*(1+growth rate year 1)/(1+discount rate)+Current dividend*(1+growth rate year 1)*(1+growth rate year 2)/(1+discount rate)^2+Current dividend*(1+growth rate year 1)*(1+growth rate year 2)^2/(1+discount rate)^2*(1+ constant growth rate)/(discount rate-constant growth rate)
=1*(1+0.35)/(1+0.11)+1*(1+0.35)*(1+0.2)/(1+0.11)^2+1*(1+0.35)*(1+0.2)/(1+0.11)^2*(1+0.01)/(0.11-0.01)
=15.81
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