Final answer:
The current stock price of Coppard Inc. is approximately $25.091, calculated using the Dividend Discount Model considering different growth rates in the dividend over time.
Step-by-step explanation:
The current stock price of Coppard Inc. can be determined by using the Dividend Discount Model (DDM) considering the variable growth rates. Initially, we calculate the present value of the dividends during the high growth phase (which lasts for 3 years), and then we calculate the present value of the perpetuity that starts after the third year when the growth rate becomes constant at 6%.
To find the present value of dividends during the high growth phase, we use the following formula for each year:
- Year 1 Dividend: D1 = D0 × (1+g1) = $1.25 × (1+0.15) = $1.4375
- Year 2 Dividend: D2 = D1 × (1+g2) = $1.4375 × (1+0.15) = $1.6531
- Year 3 Dividend: D3 = D2 × (1+g3) = $1.6531 × (1+0.15) = $1.9001
After the high growth phase, we apply the formula for the terminal value (TV) at a constant growth rate:
TV = D3 × (1+g) / (rs - g) = $1.9001 × (1+0.06) / (0.11 - 0.06) = $38.004
The present value of the terminal value is calculated back 3 years to get its value today: PV of TV = TV / (1 + rs)^3 = $38.004 / (1 + 0.11)^3 = $28.975
Finally, to get the current stock price, the present values of the dividends and the terminal value are summed up:
- PV of Year 1 Dividend: $1.4375 / (1 + rs) = $1.4375 / (1 + 0.11) = $1.2941
- PV of Year 2 Dividend: $1.6531 / (1 + rs)^2 = $1.6531 / (1.11)^2 = $1.3394
- PV of Year 3 Dividend (including TV): ($1.9001 + $28.975) / (1 + rs)^3 = ($1.9001 + $28.975) / (1.11)^3 = $22.4575
Adding these together gives us the current stock price: P0 = $1.2941 + $1.3394 + $22.4575 = $25.091