Question

Lifecycle Motorcycle Company is expected to pay a dividend in year 1 of $2, a dividend in year 2 of $3, and a dividend in year 3 of $4. After year 3, dividends are expected to grow at the rate of 7% per year. An appropriate required return for the stock is 12%. Using the multistage DDM, the stock should be worth __________ today.

Answer 1

As per dividend discount model,current value of stock is the present value of dividend.
Step-1:Present value of dividend of three years
Year	Dividend	Discount factor	Present value
a	b	c=1.12^-a	d=b*c
1	$             2	0.8929	$       1.79
2	$             3	0.7972	$       2.39
3	$             4	0.7118	$       2.85
Total			$       7.02
Step-2:Present value of dividend after year 3
Present value		=	D3*(1+g)/(Ke-g)*DF3			Where,
		=	$    60.93			D3	$             4
						g	7%
						Ke	12%
						DF3	0.7118
Step-3:Present value of all dividends
Present value of all dividends		=	$       7.02	+	$    60.93
		=	$    67.95
So, value of stock today is			$    67.95