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Nonconstantgrowth nonconstantgrowth example1

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Unformatted text preview: What is the expected market price of What is the expected market price of the stock, one year from now? D1 will have been paid out already. So, P1 is the present value (as of year 1) of D2, D3, D4, etc. D2 $2.247 P = = 1 k s ­ g 0.13 ­ 0.06 = $32.10 ^ Could also find expected P1 as: ^ P = P0 (1.06) = $32.10 1 What happens if g > ks? What happens if g > k If g > ks, the constant growth formula leads to a negative stock price, which does not make sense. The constant growth model can only be used if: ks > g g is expected to be constant forever Scenario 3: Nonconstant Growth Can no longer use just the constant growth model to find stock value. Two growth rates of dividend Must apply TVM concept Nonconstant Growth Problem Nonconstant Growth Problem Statement Suppose a firm is expected to increase dividends by 20% in one year and by 15% in two years. After that dividends will increase at a rate of 5% per year indefinitely. If the last dividend was $1 and the required return is 20%, what is the price of the stock? Remember that we have to find th...
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