As an analyst at Chitalu & Daka Securities, you are responsible for making recommendations to your firm’s clients regarding common stocks. After gathering data, you have found that their dividends have been growing at a rate of 10% per year to the current (D0) rate of K0.60 per share. The stock is currently selling for K12 per share, and you believe that an appropriate rate of return for this stock is 15% per year. i. If you expect that the dividend will continue to grow at a 10% rate into the foreseeable future, what is the highest price at which you would recommend purchasing this stock to your clients? ii. Suppose now that you determine that the company’s new product line will cause much higher growth in the near future. Your revised estimate is for a three-year period of 20% annual growth which will be followed by a return to the historical 10% growth rate. Under these new assumptions, what is the current value of the stock using the two-stage dividend growth model? iii. After considering your assumptions from Part ii, you realize that it is likely that the growth will gradually transition from 20% down to 10% rather than instantaneously. If you believe that this transition will take five years, what is the value that you place on the stock today? Use the three-stage dividend grow
As an analyst at Chitalu & Daka Securities, you are responsible for making recommendations to your firm’s clients regarding common stocks. After gathering data, you have found that their dividends have been growing at a rate of 10% per year to the current (D0) rate of K0.60 per share. The stock is currently selling for K12 per share, and you believe that an appropriate
i. If you expect that the dividend will continue to grow at a 10% rate into the foreseeable future, what is the highest price at which you would recommend purchasing this stock to your clients?
ii. Suppose now that you determine that the company’s new product line will cause much higher growth in the near future. Your revised estimate is for a three-year period of 20% annual growth which will be followed by a return to the historical 10% growth rate. Under these new assumptions, what is the current value of the stock using the two-stage dividend growth model?
iii. After considering your assumptions from Part ii, you realize that it is likely that the growth will gradually transition from 20% down to 10% rather than instantaneously. If you believe that this transition will take five years, what is the value that you place on the stock today? Use the three-stage dividend growth model.
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