Final answer:
The value of Delta Company's stock today can be determined using the Gordon Growth Model by considering the recent dividend payment, expected growth rates, and current interest rates. After calculating the future dividends and discounting them to their present value with the growth rates of 20% for the next year and 7% perpetually thereafter, against the interest rate of 14%, we obtain the intrinsic value of the stock.
Step-by-step explanation:
To determine the value of Delta Company's stock today, we can use the Gordon Growth Model (also known as the Dividend Discount Model). This model accounts for the expected growth rates and the recent dividend. Given that Delta Company has a current dividend of $2.60, an expected growth rate of 20% for the next year and then 7% perpetually thereafter, and with an interest rate at 14%, we can calculate the price of the stock today. The value today is based on the present value of all future expected dividends, adjusted for growth and the discount rate.
Initially, we'd project the dividend one year from now by applying the 20% growth rate: Dividend Year 1 = $2.60 * (1 + 0.20) = $3.12. Thereafter, dividends would grow at the perpetual rate of 7%. The Gordon Growth Model for the second stage, starting from Year 2 onward, would be Dividend Year 2 / (Interest Rate - Perpetual Growth Rate). Plugging in the numbers, we'd have $3.12 * (1 + 0.07) / (0.14 - 0.07).
To find the present value of these dividends, we discount them back to today's value, using the current interest rate of 14%. The formula for the present value of a perpetuity is the perpetual dividend divided by the difference between the discount rate and the growth rate. Lastly, for accuracy, the initial dividend growth burst is included in the valuation. Combining these factors provides us with the intrinsic value of Delta Company's stock today.