Question

assecert = dout of d0 Asa proftatosal analye rou are respensible for valuing ateck. After cathering data on inital vayuiont the Biuth Compaiv you hare tatimated that its eividend kas been crowing at a farle of 10.5 K peryes. Yoo alss estimate that ceut year'a dhidend will be 55.39 perahare. Dhe atock in selling at {30:68 per ahare, and you hplieve that an apprepriate diveount eate is 12N: Vou expect that the dividend will continue to gaw at 10.5x for the fore see able hrture. Whar is the hishert price you weuld recommend your clients fay to gurehine this seck? (As peintal Mase den your valuation, would rou ay the atpch is cerrectly valued? (4 painta) Suppote that ahn loeking at the company more clopely row decide that it in ge ning colyoe ta maturity and peu think thas the dieldend wilf enly erow at 16.5% for 4 more Pearh. After that, row thinkit will anly erow at 8.5.k. What is yoer ne wevaluation? 20 palntay

Answer 1

The question deals with valuing a stock using the Dividend Discount Model by estimating the price based on the present value of future dividends and adjusting for changes in dividend growth rates over time.

Step-by-step explanation:

The student's question pertains to stock valuation using the Dividend Discount Model (DDM), which is a method for estimating the price of a company's stock based on the present value of its future dividends. To answer this question, we would first calculate the present value of the expected dividends that are growing at a constant rate. Then, if the company's dividend growth rate is expected to change in the future, we adjust our calculations accordingly.

Initially, the value of the stock is calculated assuming a constant growth rate in dividends. This is based on the Gordon Growth Model, which is used under DDM, and involves dividing the next year's expected dividend by the discount rate minus the dividend growth rate. A revaluation is then performed when we receive additional information that the company is approaching maturity and dividend growth rates are expected to change.