Hypo Tech expects its net income to grow at 20 percent a year for the next two years and then taper off to a constant 5 percent annual rate of growth. The firm maintains a constant dividend payout ratio. Which one of the following models is best suited for computing the current value of this firm's stock?
A)irregular dividend
B)constant perpetual growth
C)constant dividend
D)two-stage dividend growth
E)perpetuity formula

Question

Quizplus · Accepted Answer

The two-stage dividend growth model is best suited for Hypo Tech's situation because it accounts for an initial period of rapid growth (20 percent a year for the next two years) followed by a transition to a lower, constant growth rate (5 percent annually). This model can handle the change in growth rates, making it the most appropriate choice.

Hypo Tech Expects Its Net Income to Grow at 20