Lifecycle Motorcycle Company is expected to pay a dividend in Year 1 of $2.00, a dividend in Year 2 of $3.00, and a dividend in Year 3 of $4.00. After Year 3, dividends are expected to grow at the rate of 7% per year. An appropriate required return for the shares is 12%. Using the multistage DDM, the shares should be worth ________ today.

Question

Quizplus · Accepted Answer

The multistage Dividend Discount Model (DDM) calculates the present value of expected dividends. The present value of dividends for the first three years is calculated separately, and then the present value of the perpetuity starting from Year 4 is added. The formula for the perpetuity is D4 / (r - g), where D4 is the dividend in Year 4, r is the required return, and g is the growth rate. The present value of these cash flows at a 12% discount rate gives the share price.

Lifecycle Motorcycle Company Is Expected to Pay a Dividend in Year