marsilni

15. multi-stage dividend discount model scenario

you have a period of high growth rate followed by an infinite period of stable growth.

the DDM with growth is

MV 0f share = D1/(r-g) or D0(1+g)/(r-g) depending on whether you'r given the current dividend or future dividend in the question.

D0= current dividend
D1= dividend in 1 yrs time
r= cost of equity/ required rate of return
g= growth rate(same as in 14 above)

Step1. Calculate cost of equity using CAPM

r= 6 + (11-6)*1.2 = 12%

Step2. Calculate what dividend will be in the 3rd year
Current D0 = 3
Year 1 D1 = 3 * 1.2 = 3.6 (20% growth)
Year 2 D2 = 3.6 * 1.2 = 4.32 (20% growth)
Year3 D3 = 4.32 * 1.09 = 4.71 (9% growth)

Step3. Calculate using DDM the pv of dividends with growth from 3rd year to infinity

P2 = D3 / (r-g) = 4.71 / (.12 - 0.09) = 196.96

Step4. Now calculate the value of the stock by calculating PV of cashflows using ur calc

Cashflow in Y1=D1=3.6
Cashflow in Y2= D2 + the value of dividend stream u calculated in Step3= 4.32+ 196.96

Discount rate= cost of equity= 12%



hope it helps.