Common stock value: Variable growth Lawrence Industries’ most recent annual dividend was
$1.80 per share (D0 = $1.80), and the firm’s required return is 11%. Find the market value of
Lawrence’s shares when:
a. Dividends are expected to grow at 8% annually for 3 years, followed by a 5% constant annual
growth rate in years 4 to infinity.
b. Dividends are expected to grow at 8% annually for 3 years, followed by a 0% constant annual
growth rate in years 4 to infinity.
c. Dividends are expected to grow at 8% annually for 3 years, followed by a 10% constant
annual growth rate in years 4 to infinity.
Solution
Answer-a D0 = $1.80 Required rate of return = 11% Growth rate of dividends:
8% annually for 3 years 4% till infinity Therefore value stock = year Dividends
Present value 1 $1.94 $1.75 2 $2.10 $1.70 3 $2.18 $1.60 4 $ 1.82 $1.20 Total =
$6.25 Answer-b D0 = $1.80 Required rate of return = 11% Growth rate of
dividends: 8% annually for 3 years 0% till infinity Therefore value stock =
year Dividends Present value 1 $1.94 $1.75 2 $2.10 $1.70 3 $2.10 $1.54 4 $2.10 $1.38
Total = $6.37 Answer-c D0 = $1.80 Required rate of return = 11% Growth rate of
dividends: 8% annually for 3 years 10% till infinity Therefore value stock =
year Dividends Present value 1 $1.94 $1.75 2 $2.10 $1.70 3 $2.31 $1.69 4 $ 33.09
$21.80 Total = $26.94