Question

Descendants Corporation is a growth firm that recently had its IPO. It is not currently paying dividends and its first dividend is expected in year 5. After this, it is expected to offer dividends with growth rates of 15% for two years. After this time, it is expected to reach stable growth with a dividend growth rate of 4% forever. If the dividend discount model is used to value the stock, in what year does the horizon value from stable growth belong

Answer 1

year 7

Step-by-step explanation:

The dividend discount model (DDM) is used to determine the value of stock by discounting the dividend to derive the present value of the stock.

Types of DDM

1.two stage : one stage of rapid growth and a stage of constant growth

3. three stage : one stage of super normal growth, followed by a stage of normal growth and then constant growth

For this company

first 5 years = o dividends

next 2 years = 15%

7th year - constant growth

Shortcomings of the DDM

It doesn't take a control perspective

It is unsuitable for firms that don't pay dividends