Common Stock Pricing part 2

• what if dividends don't grow at a constant rate of g?

  Could be fast growth for a while, then slow down

  Could be no growth for a while, then speed up

  Could be no dividend at all, right now, but maybe in the future

  KEY : must assume a constant growth at some point in the future, year t

  • 2 reasons : mathematically and predicting
• P0 =

  Pt =

  D1/ R -g

  D down t +1 / R - g
• price equation is valid whenever the

  growth rate in dividend is constant
• 2-stage growth model

  also called "supernormal growth"

  • still must assume constant growth occurs eventually

  process

  • when constant growth starts at the end of year "t"
  • determine the actual dividends during the non-constant growth period
  • determine the "horizon value". (value at time constant growth starts Pt)
  • find NPV of non-constant dividend plus horizon value at required 0 return (CF0 = 0, CFt is Dt + Pt)
  • NPV = P0
• Generic stock just paid a dividend of $0.25 and has announced that they will double the dividend each year for the next three years, then establish a constant growth rate of 6% afterward. If the required return is 12%, what is the intrinsic value of the stock?

  $27.81
• Stock just paid a dividend of $2 that is expected to grow at 50% per year for the next four years, then at a constant rate of 4%. If the required return is 9%, what should be the current price of the stock?

  $168.12
• what if there isn't a dividend yet?

  pretend that it will pay one some day

  there is just a future price

  P0 is simply the PV of the future price

  tick is what year to find price
• Company has announced that it will pay its first dividend of $5 per share in eight years, and that the dividend will grow at 4% afterward. If you require a return of 15%, how much will you be willing to pay for thestock today?

  $17.09