Assume that the average firm in your company's industry is...

Assume that the average firm in your company's industry is expected to grow at a constant rate of $6 \%$ and its dividend yield is $7 \% .$ Your company is about as risky as the average firm in the industry, but it has just successfully completed some $\mathrm{R} \& \mathrm{D}$ work that leads you to expect that its earnings and dividends will grow at a rate of $50 \%\left[\mathrm{D}_{1}=\mathrm{D}_{0}(1 \text { ? } g)=\mathrm{D}_{0}(1.50)\right]$ this year and $25 \%$ the following year, after which growth should match the $6 \%$ industry average rate. The last dividend paid $\left(\mathrm{D}_{0}\right)$ was $\$ 1 .$ What is the value per share of your firm's stock?

Key Concepts

Present Value Calculation

Present value calculation is a fundamental concept in finance, used to determine the current worth of a future cash flow or series of cash flows. By discounting future dividends using the appropriate discount rate, the model accounts for time value of money, thereby allowing investors to compare the value of money received in the future with money in hand today.

Terminal Value

Terminal value is the estimated value of a company’s dividends beyond the explicit forecast period, assuming a constant growth rate into perpetuity. It captures the majority of the stock’s value in many valuation models, especially when the growth rate eventually settles to a stable level, and is calculated using formulas that typically incorporate the constant growth model.

Dividend Discount Model (DDM)

The dividend discount model is a valuation method that estimates the value of a stock based on the present value of its future dividend payments. This model assumes that dividends represent the cash flows received by shareholders, which, when appropriately discounted back at a certain required rate of return, reflect the intrinsic value of the stock.

Multi-Stage Dividend Growth Model

The multi-stage dividend growth model extends the basic dividend discount model by allowing for different growth rates in different phases of a company’s development. It recognizes that a company's growth may be high initially and then slow down to a more stable rate over time. This concept is essential when forecasting dividends for companies undergoing rapid change or initial expansion before settling into a long-term growth pattern.

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