Unformatted text preview: st way to value such nonconstant growth stocks is to set the
situation up on a time line as shown below:
0 r = 13%
s
g = 30% 1 2 3 4     2.600 g = 30% 3.380 2.301
2.647
3.045
46.116
54.109 g = 30% 4.394 Ö3 = $66.54 = g = 6% 4.658 4.658
0.13 0.06 Simply enter $2 and multiply by (1.30) to get D1 = $2.60; multiply that result by 1.3
to get D2 = $3.38, and so forth. Then recognize that after year 3, Temp Force
becomes a constant growth stock, and at that point Ö3 can be found using the constant
growth model. Ö3 is the present value as of t = 3 of the dividends in year 4 and
beyond.
With the cash flows for D1, D2, D3, and Ö3 shown on the time line, we discount
each value back to year 0, and the sum of these four Vs is the value of the stock
today, 0 = $54.109.
The dividend yield in year 1 is 4.80 percent, and the capital gains yield is 8.2
percent:
§ § § Dividend yield = $2.600
= 0.0480 = 4.8%.
$54.109 Capital gains yield = 13.00%  4.8% = 8.2%.
During the nonconstant growth period, the dividend yields and capital gains yields are
not constant, and the capital gains yield does not equal g. However, after year 3, the
stock becomes a constant growth stock, with g = capital gains yield = 6.0% and
dividend yield = 13.0%  6.0% = 7.0%. Mini Case: 7  21 h. Answer: Is the stock price based more on longterm or shortterm expectations? Answer
this by finding the percentage of Temp Force current stock price based on
dividends expected more than three years in the future.
$46.116
= 85.2%.
$54.109
Stock price is based more on longterm expectations, as is evident by the fact that
over 85 percent of temp force stock price is determined by dividends expected more
than three years from now. i. Suppose Temp Force is expected to experience zero growth during the first 3
years and then to resume its steadystate growth of 6 percent in the fourth year.
What is the stock¶s value now? What is its expected dividend yield and its
capital gains yield in year 1? In year 4? Answer: Now...
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 Spring '12
 jamnadas
 Valuation, Dividend yield

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