Question

LBD's dividend is expected to grow at 20% for the next five years. After that, g...

LBD's dividend is expected to grow at 20% for the next five years. After that, g will be 4% forever. R = 10%. The most recent dividend paid was $2. You are a stock analyst.

Using the DDM, what do you estimate LBD's stock price should be today? Please show every step and how you did it

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Answer #1

Price = D1 / ( 1 + r ) + D2 / ( 1 + r )2 + D3 / ( 1 + r )3 + D4 / ( 1 + r )4 + D5 / ( 1 + r )5 + D6 / [ ( r - g ) * ( 1 + r )5 ]
        = [ D0 * ( 1 + g ) / ( 1 + r ) ] + [ D0 * ( 1 + g )2 / ( 1 + r )2 ] + [ D0 * ( 1 + g )3 / ( 1 + r )3 ] + [ D0 * ( 1 + g )4 / ( 1 + r )4 ] + [ D0 * ( 1 + g )5 / ( 1 + r )5 ] + [ D5 * ( 1 + g2 )/ ( r - g2 ) * ( 1 + r )5 ]

        = [ 2 * ( 1 + 0.20 ) / ( 1 + 0.10 ) ] + [ 2 * ( 1 + 0.20 )2 / ( 1 + 0.10 )2 ] + [ 2 * ( 1 + 0.20 )3 / ( 1 + 0.10 )3 ] + [ 2 * ( 1 + 0.20 )4 / ( 1 + 0.10 )4 ] + [ 2 * ( 1 + 0.20 )5 / ( 1 + 0.10 )5 ] + [ 2 * ( 1 + 0.20 )5 * ( 1 + 0.04 ) / ( 0.10 - 0.04 ) * ( 1 + 0.10 )5 ]

       = 2.1818 + 2.3802 + 2.5965 + 2.8326 + 3.0901 + 53.5618

       = $ 66.64 Answer

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