Question

A stock just paid a dividend of $2.16. The dividend is expected to grow at 21.30% for five years and then grow at 4.64% thereafter. The required return on the stock is 14.85%. What is the value of the stock?

Answer 1

The value of the stock is calculated through a two-stage dividend discount model, considering initial growth of dividends at 21.30% for five years followed by a perpetual growth rate of 4.64%, with a required return of 14.85%.

Step-by-step explanation:

To calculate the value of a stock with dividends growing at different rates over time, a two-stage dividend discount model can be used. The first stage involves the dividend growth at an initial high rate, and the second stage uses a lower perpetual growth rate. Given that the stock just paid a dividend of $2.16 and is expected to grow at 21.30% for the next five years, followed by a perpetual growth rate of 4.64% thereafter, the required return being 14.85%, we can calculate the present value of these dividends and find the stock's intrinsic value using these inputs and the formula for the dividend discount model.