1.
Uneven dividend growth model problem
You want to value Maxima Machinery stock.
You expect the firm to have a
growth rate of 12% for the next two years, 9% for the succeeding two years, after
which the firm’s growth will be a constant 4.5% per year.
Maxima has just paid a
dividend of $2.00.
If the discount rate is 10%, what is the price of the stock?
Div
0
= $2.00
Div
1
= 2(1.12) = 2.24
Div
2
= 2(1.12)
2
= 2.51
Div
3
= 2(1.12)
2
(1.09) = 2.73
Div
4
= 2(1.12)
2
(1.09)
2
= 2.98
Div
5
= 2(1.12)
2
(1.09)
2
(1.045) = 3.11
Value(year 4) = Div
5
/kg = 3.11/.1.045 = $56.63
Timeline:
Year
0
1
2
3
4
Value
0
2.24
2.52
2.73
2.98
56.63
59.61
Value(year 0) = Div
1
/1+k + Div
2
/(1+k)
2
+ Div
3
/(1+k)
3
+ Div
4
/(1+k)
4
+
TerminalValue/(1+k)
4
= Value(year 0) = 2.24/1+.1 + 2.52/(1+.1)
2
+ 2.73/(1+.1)
3
+ 59.61/(1+.1)
4
= $46.88
2.
Using Multiples for Valuation
Texaco wants to buy a chemicals plant.
Exxon is in the chemicals business, and
earns 20% of its net income from chemicals.
The rest of Exxon’s earnings come
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
This is the end of the preview.
Sign up
to
access the rest of the document.
 Spring '08
 WHITE
 Finance, Revenue, Net Income, Financial Ratio, P/E ratio

Click to edit the document details