Another Example of Two-Phase Div Discount Model for Stocks

# Another Example of Two-Phase Div Discount Model for Stocks...

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H AAS S CHOOL OF B USINESS U NIVERSITY OF C ALIFORNIA AT A USTIN UGBA 103 S UMMER 2008 A VINASH V ERMA E XAMPLE : V ALUING S TOCK WITH T WO P HASES OF GROWTH IN D IVIDENDS Suppose ABC Corp Inc. just paid out a dividend ( D 0 ). The firm anticipates that its annual dividends will grow at 27% a year over the next 5 years (from October 2007 to October 2012). From October 2012 onwards, the management expects that the firm’s dividends will grow in perpetuity at 6% per year. Given that the stock is currently selling at \$190.24, work out the dividend that has just been paid out assuming that the risk of the firm’s future cash flows justify a discount rate of 18%. A NSWER WITH FORMULA : We are given that P 0 = \$190.24, g H = 27%, n = 5, g L = 6%, and r = 18%. Thus, we have everything other than D 0 in the formula below: 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 0 0 0 + - + + + + + - - + = Solving for

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## This note was uploaded on 02/12/2012 for the course UGBA 101A taught by Professor Mccullough during the Spring '08 term at University of California, Berkeley.

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Another Example of Two-Phase Div Discount Model for Stocks...

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