Lawrence Industries' most recent annual dividend was $1.80 per share (D0equals$ 1.80 ), and the firm's required return is 11 %. Find the market value of Lawrence's shares when dividends are expected to grow at 8 % annually for 3 years, followed by a 5 % constant annual growth rate in years 4 to infinity.

Question

Jackie

Business

25 November, 07:10

Lawrence Industries' most recent annual dividend was $1.80 per share (D0equals$ 1.80 ), and the firm's required return is 11 %. Find the market value of Lawrence's shares when dividends are expected to grow at 8 % annually for 3 years, followed by a 5 % constant annual growth rate in years 4 to infinity.

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Answers (1)

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Joshua Lynch · Answer 1

The price of the stock today is $34.13

Explanation:

The price of the stock that grows at two different growth rates can be calculated using the two stage growth model of DDM. The DDM requires to discount back the dividends to calculate the price of the share today.

The price of the stock today is,

P0 = D1 / (1+r) + D2 / (1+r) ^2 + ... + Dn / (1+r) ^n + [ (Dn * (1+g) / (r - g)) / (1+r) ^n]

P0 = 1.8 * (1+0.08) / (1+0.11) + 1.8 * (1+0.08) ^2 / (1+0.11) ^2 +

1.8 * (1+0.08) ^3 / (1+0.11) ^3 + [ (1.8 * (1+0.08) ^3 * (1+0.05) / (0.11-0.05)) / (1+0.11) ^3]

P0 = $34.127 rounded off to $34.13