It is common practice in security analysis to modify the basic dividend growth model by allowing more than one stage of growth, with the growth factors being different in the different stages. As an example consider company Z, which currently distributes dividends of $15M annually. The dividends are expected to grow at the rate of 12% for the next 4 years and at a rate of 4% thereafter. (a) Using a dividend discount approach with an interest rate of 14%, what is the value of the company? (b) Find a general formula for the value of a company satisfying a two-stage growth model. Assume a growth rate of G for k years, followed by a growth rate of g thereafter, and an initial dividend of D1.

It is common practice in security analysis to modify the basic dividend growth model by allowing more than one stage of growth, with the growth factors being different in the different stages. As an example consider company Z, which currently distributes dividends of $15M annually. The dividends are expected to grow at the rate of 12% for the next 4 years and at a rate of 4% thereafter. (a) Using a dividend discount approach with an interest rate of 14%, what is the value of the company? (b) Find a general formula for the value of a company satisfying a two-stage growth model. Assume a growth rate of G for k years, followed by a growth rate of g thereafter, and an initial dividend of D1.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter11: Determining The Cost Of Capital

Section: Chapter Questions

Problem 5MC

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