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2. (three-stage DDM) The current dividend for Hugh Corp is $4.00. In stage 1, which lasts...

2. (three-stage DDM) The current dividend for Hugh Corp is $4.00. In stage 1, which lasts 4 years, the dividend will grow at 30% per year. In stage 2, which also lasts 4 years, the dividend will grow at 15% per year. Finally, in stage 3, the dividend will grow at 6% forever. If the required rate of return is 11%, what is the value per share?

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Answer #1
D 0 4
D1 4+30% 5.2
D2 5.20+30% 6.76
D3 6.76+30% 8.79
D4 8.79+30% 11.43
D5 11.43+15% 13.14
D6 13.14+15% 15.11
D7 15.11+15% 17.38
D8 17.38+15% 19.99
D9 19.99+6% 21.19
Horizon value at Year-8 = 21.19 / (11-6)% =   423.80
Year Cashflows PVF at 11% Present value
1 5.2 0.900901 4.684685
2 6.76 0.811622 5.486568
3 8.79 0.731191 6.427172
4 11.43 0.658731 7.529295
5 13.14 0.593451 7.79795
6 15.11 0.534641 8.078423
7 17.38 0.481658 8.371223
8 19.99 0.433926 8.674191
8 423.8 0.390925 165.6739
Value of stock per share 222.72
Answer is 222.72
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