Basically I would start by drawing a timeline. Put the first $1 dividend at YEAR 1. Then the problem says to grow the dividend by 50% for the next 2 years. Calculate this, and then put those dividends down for YEAR 2 and YEAR 3. Then the growth slows down for YEAR 4 and YEAR 5. Finally on YEAR 6 the dividends are growing constantly at 6%.
Use the dividend you calculated for YEAR 5 and add a growth of 6% to get to YEAR 6. This is the dividend you want to use in the Gordon Growth Model. Calculate the present value for the stock using the Gordon Growth Model. Remember that the result from the Gordon Growth Model will be the value of the stock at YEAR 5. Discount that value back to YEAR 0 then discount each of the dividend payments individually from years 1 through 5. Discount all of these back and add everything together.
That's the best I can do without actually doing the problem. I hope it helps.
Also FYI - you could use the Sum of Perpetuities Method in a similar way. SPM is generally more accurate in the real world. You can learn more about it here:
http://en.wikipedia.org/wiki/Sum_of_perp...
How do I calculate the current price of a stock without knowing it's previous price? I am not looking for you to do the work for me, just point me in the right direction on how I can complete it myself.
Today, it announced a $1 per share dividend to be paid a year from now, the first dividend since the crisis. Analysts expect dividends to increase by 50 percent a year for another 2 years. Then they expect dividends to increase by 20 percent a year for another 2 years. After the fifth year, dividend growth is expected to settle down to a more moderate long-term growth rate of 6 percent. If the firm’s investors expect to earn a return of 14 percent on this stock, what must be its price?
Do I use the gordon growth model? Nonconstant growth model? Or what? THANK YOU
