DIVIDEND DISCOUNT MODEL FOR NONCONSTANT GROWTH STOCK Supernormal growth(g1)...
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| DIVIDEND DISCOUNT MODEL FOR NONCONSTANT GROWTH STOCK | |||
| Supernormal growth(g1) for 3 years | 25% | ||
| Constant growth(g2) after the 3rd year (refer to cell E9) | 2.71% | ||
| Annual dividend (D0) (refer to cell E13) | $2.56 | ||
| Required rate of return (R) (refer to cell E10) | 7.17% | ||
| Step 1: Find the PV of the dividends expected in the first three periods | |||
| Year (t) | Dt = D0*(1+g1)t | PV = Dt/(1+R)t | |
| 1 | $3.20 | $2.99 | |
| 2 | $4.00 | $3.48 | |
| 3 | $5.00 | $4.06 | |
| (A)Sum of PV of dividends | $10.53 | ||
| Step 2: Find P3since constant growth rate is assumed beyond the third period | |||
| Dividend at period 4(D4) = D3*(1+g2) | $5.14 | ||
| Fair price at period 3(P3) =D4/(R-g2) | |||
| (B)PV of P3=P3/(1+R)^3 | |||
| Step 3: Sum of (A) and (B) | |||
| Fair value(P0) = (A)+(B) | |||
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