suppose Atp Corp. has a current dividend of D0 = $5, which is expected to shrink at the rate, g1 = 10%,

suppose Atp Corp. has a current dividend of D0 = $5, which is expected to shrink at the rate, g1 = 10%, for 5 years but grow at the rate, g2 = 4%, forever. With a discount rate of k = 10%, what is the present value of the stock?

 

Answer

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STEP 1

D1=D0*(1+g)=5(1+(-0.1)=4.8

D2=D1*(1+g)=4.8(1+(-0.10)=4.05

D3=4.05(1+(-0.10))=3.645

D4=3.645(1+(-0.10))=3.28

D5=3.28(1+(-0.10))=1.95

STEP 2

Constant Perpetual Growth Model=P0=(D1/(K-G))

P5=D6/(K-G)

P5=1.95(1+0.04)/(0.10-0.04)=51.16

 

STEP 3

P0=[4.8/(1+0.10)]^1+[4.05/(1+0.10)^2]+[3.645/(1+0.10)^3]+[3.28/(1+0.10)^4]+[1.95/(1+0.10)^5]

+[51.16/(1+0.10)^5]=46.03