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Unformatted text preview: H AAS S CHOOL OF B USINESS U NIVERSITY OF C ALIFORNIA AT B ERKELEY BA 103 A VINASH V ERMA D IVIDEND D ISCOUNT M ODELS F OR V ALUING C OMMON S TOCKS I : STEADY GROWTH RATE : g r D P- = 1 This is known as Gordons formula . II : TWO STAGE MODEL : n L L n H n H H H r g r g g D r g g r g D P ) 1 )( ( ) 1 ( ) 1 ( 1 1 1 1 +- + + + + +- - + = where: g H is the annual rate of growth in dividends during the super-growth phase of n years, and g L is the annual rate of growth in dividends expected to prevail for ever from t=n onwards. E XAMPLE : The dividends of Rapid Communications Inc. are expected to grow at 35% per year for the next 7 years. After that, the rate of growth in dividends will stabilize at 10% per year. Given that the capitalization rate for the company is 22.5%, and the dividend it just paid was $10, work out its current price....
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- Summer '07