Question

Use the following data to calculate your stock value. Assume you use the historical geometric average growth rate (rounded to 2 decimals) for initial growth rate for 4 years. Then you believe it will drop to constant growth rate of 7% per year indefinitely.

Recent total dividend payments were $5Million and there are 5million shares outstanding.

T-bill rate was 3.2%, S&P500 mkt return was 6.61%, and beta of this company is 1.2.

YEAR	DIVIDEND (*M represent millions)
2015	$1.10M
2016	$1.60M
2017	$2.20M
2018	$3.00M
2019	$3.90M
2020	$5.00M

What is the stock price per share using dividend discount model?

If the H-Model is applied, what should be the stock value per share?

Answer 1

cost of equity=3.2%+1.2*(6.61%-3.2%)=7.2920%

the stock price per share using dividend discount model

=equity value/number of shares

=((5.00*(1+7%))/(7.2920%-7%))/5

=366.44

geometric growth rate=(5.00/1.10)^(1/5)-1=35.37%

If the H-Model is applied, what should be the stock value per share

=((5.00*(1+35.37%)^1)/(1+7.2920%)^1+(5.00*(1+35.37%)^2)/(1+7.2920%)^2+(5.00*(1+35.37%)^3)/(1+7.2920%)^3+(5.00*(1+35.37%)^4)/(1+7.2920%)^4+((5.00*(1+35.37%)^4*(1+7%))/(7.2920%-7%))/(1+7.2920%)^4)/5

=935.98