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Lifecycle Motorcycle Company is expected to pay a dividend in year 1 of $2, a dividend...

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Finance

Lifecycle Motorcycle Company is expected to pay a dividend inyear 1 of $2, a dividend in year 2 of $3, and a dividend in year 3of $4. After year 3, dividends are expected to grow at the rate of7% per year. An appropriate required return for the stock is 12%.Using the multistage DDM, the stock should be worth __________today.

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As per dividend discount model,current value of stock is the present value of dividend.
Step-1:Present value of dividend of three years
Year Dividend Discount factor Present value
a b c=1.12^-a d=b*c
1 $             2      0.8929 $       1.79
2 $             3      0.7972 $       2.39
3 $             4      0.7118 $       2.85
Total $       7.02
Step-2:Present value of dividend after year 3
Present value = D3*(1+g)/(Ke-g)*DF3 Where,
= $    60.93 D3 $             4
g 7%
Ke 12%
DF3      0.7118
Step-3:Present value of all dividends
Present value of all dividends = $       7.02 + $    60.93
= $    67.95
So, value of stock today is $    67.95

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Lifecycle Motorcycle Company is expected to pay a dividend inyear 1 of $2, a dividend in year 2 of $3, and a dividend in year 3of $4. After year 3, dividends are expected to grow at the rate of7% per year. An appropriate required return for the stock is 12%.Using the multistage DDM, the stock should be worth __________today.

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