Growth Valuations: stock pays $2 dividend, growing 15%/yr

mikext702

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Feb 26, 2008
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Any help / Tips appreciated.

ABC currently pays a dividend of $2 per share and the dividend will grow at at 15% per year for 3 years, and then at 10% for the next three years, later it is expected to grow at a 5% rate forever. What value would you place on the stock at and 18% return? Would your value change if you held the stock for only 3 years?
 
Re: Growth Valuations

You must learn to use "Basic Principles". You can write any conbination of return or cashflow if you are not tied to pretty formulas. Use the formulas when they apply, but learn the "Basic Principles" for everything else.

I'll assume dividends are at the end of each year.

i = 0.18

v = 1/(1+i)

Total Value = 2v + 2*(1.15)v + 2*(1.15^2)v^2 + 2*(1.15^3)v^3 + 2*(1.15^3)(1.10)v^4 + 2*(1.15^3)(1.10^2)v^5 + 2*(1.15^3)(1.10^3)v^6 + 2*(1.15^3)(1.10^3)(1.05)v^7 + 2*(1.15^3)(1.10^3)(1.05^2)v^8 + ...

It's not pretty, but it is complete. You just need to get your algrabra up to speed and add that guy up. Really, it's not as difficult or scary as it may appear.
 
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