Better Mousetraps has come out with an improved product, and the world is beating a path to its door. As a result, the firm projects growth of 20% per year for four years. By then, other firms will have copycat technology, competition will drive down profit margins, and the sustainable growth rate will fall to 5%. The most recent annual dividend was DIV1 = $1 per share. What are the expected values of (i) DIV1 , (ii) DIV2, (iii) DIV3, and (iv) DIV4? What is the expected stock price four years from now? The discount rate is 10%. What is the stock price today? Find the dividend yield, DIV1/P0. What will next year's stock price, P1, be? What is the expected rate of return to an investor who buys the stock now and sells it in one year?
Better Mousetraps has come out with an improved product, and the world is beating a path to its door. As a result, the firm projects growth of 20% per year for four years. By then, other firms will have copycat technology, competition will drive down profit margins, and the sustainable growth rate will fall to 5%. The most recent annual dividend was DIV1 = $1 per share.
- What are the expected values of (i) DIV1 , (ii) DIV2, (iii) DIV3, and (iv) DIV4? What is the expected stock price four years from now? The discount rate is 10%.
- What is the stock price today? Find the dividend yield, DIV1/P0.
- What will next year's stock price, P1, be? What is the expected
rate of return to an investor who buys the stock now and sells it in one year?
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4. Compute the value of Better Mousetraps for assumed sustainable growth rates of 6% through 9%, in increments of .5%.
5. Compute the percentage change in the value of the firm for each 1 percentage point increase in the assumed final growth rate, g.
6. What happens to the sensitivity of intrinsic value to changes in g? What do you conclude about the reliability of estimates based on the dividend growth model when the assumed sustainable growth rate begins to approach the discount rate?
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