Question

Dyson Corporation, which has 2 million shares outstanding, is experiencing rapid growth. It’s most recent dividend was $2 per share, but it expects to increase the dividend by 25% for each of the next two years. After that dividend growth will be a more modest 4% per year, in perpetuity.

1. Assuming that the appropriate discount rate is 8% per year, what is the market value of a share of Dyson corporation stock?
2. Assume now that Dyson is also considering an acquisition of Phelps Corporation.   Should it acquire Phelps’ assets, Dyson would be able to increase its own dividends by $1 per share, beginning a year from now and continuing in perpetuity.   (This is in addition to the dividends previously described). Assume that the appropriate discount rate for valuing these dividends is also 8% per year. The cost of acquiring Phelps’ assets would be $28 million (or $14 per existing Dyson share). Assuming that Dyson completes the acquisition on these terms, what would be the value of a share of Dyson common stock?    

Answer 1

Dear Reader

The question is has used the gorden model of dividend valuation.

First read the concept provided in question and then see the calculation part.

Where required assumptions are made. If different assumptions are made then answer would be different.

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