Question

Nike will pay an annual dividend of $0.95 one year from now. Analysts expect this dividend to grow at 6% per year for three years. Thereafter, growth will slow down to 2% per year and remain there for the foreseeable future. According to the dividend discount model, what is the value of a share of Nike stock today if the firm’s cost of equity capital is 9.0%? Do not use Excel, formulas only

Answer 1

Growth rate for 1st three years = 6%

Dividend for year 1 (D1) = $0.95

Dividend for year 2 (D2) = 0.95 x (1+6%) = $1.007

Dividend for year 3 (D3) = $1.007 x (1+6%) = $1.067

Dividend for year 4 (D4) = $1.067 x (1+6%) = $1.131

Dividend growth rate after year 4 (g) = 2%

Cost of Equity Capital (Ke) = 9%

Terminal value of dividends after year 4 at the end of year 4 = D4 x (1+g) / (Ke-g)

Terminal value of dividends after year 4 at the end of year 4 = 1.131 x (1+2%) / (9%-2%)

Terminal value of dividends after year 4 at the end of year 4 = $16.487

PV of cashflows:

Year	Dividend	Terminal Value	Total Cashflow	PVF@9%	PV
1	0.950		0.950	0.9174	0.87
2	1.007		1.007	0.8417	0.85
3	1.067		1.067	0.7722	0.82
4	1.131	16.487	17.619	0.7084	12.48
			Value of Nike Stock	15.02