Nachman Industries just paid a dividend of D0 = $1.32. Analysts expect
The company's dividend to grow by 30% this year, by 10% in Year 2, and at a constant rate of 5% in Year 3 and thereafter. The required return on this low-risk stock is 9.00%. What is the best estimate of the stock's current market value?

Question

Quizplus · Accepted Answer

To estimate the stock's current market value, we use the Dividend Discount Model (DDM) for a multi-stage growth model. The dividends for the first three years and the terminal value at the end of Year 3 (which assumes a constant growth rate thereafter) are calculated and then discounted back to the present value at the required return rate.1. Calculate future dividends:- Year 1: D1 = D0 * (1 + g1) = $1.32 * (1 + 0.30) = $1.716- Year 2: D2 = D1 * (1 + g2) = $1.716 * (1 + 0.10) = $1.8876- Year 3: D3 = D2 * (1 + g3) = $1.8876 * (1 + 0.05) = $1.981982. Calculate the terminal value at the end of Year 3, using the Gordon Growth Model (assuming constant growth thereafter):- Terminal Value at end of Year 3 = D3 * (1 + g3) / (r - g3) = $1.98198 * (1 + 0.05) / (0.09 - 0.05) = $52.152053. Discount D1, D2, D3, and the Terminal Value back to present value:- PV of D1 = $1.716 / (1 + 0.09)^1 = $1.57523- PV of D2 = $1.8876 / (1 + 0.09)^2 = $1.58731- PV of D3 = $1.98198 / (1 + 0.09)^3 = $1.51547- PV of Terminal Value = $52.15205 / (1 + 0.09)^3 = $40.209994. Sum the present values to get the current market value:- Current Market Value = $1.57523 + $1.58731 + $1.51547 + $40.20999 ≈ $44.87Therefore, the best estimate of the stock's current market value is approximately $44.87.

Nachman Industries Just Paid a Dividend of D0 = $1