D0 = $1.50. You assume a growth rate of 40% for the first year and a constant 10% thereafter. You require a 15% rate of return and the current price per share is $36. The stock is

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The value of the stock can be calculated using the dividend discount model (DDM) for a two-stage growth model. The dividend in the first year (D1) is $1.50 * 1.40 = $2.10. From the second year onwards, the dividend grows at a constant rate of 10%. The present value of D1 is $2.10 / (1 + 0.15) = $1.8261. The present value of the dividends from the second year onwards is calculated as a perpetuity: D2 / (required rate of return - growth rate) = ($2.10 * 1.10) / (0.15 - 0.10) = $2.31 / 0.05 = $46.2. This value needs to be discounted back to the present value: $46.2 / (1 + 0.15) = $40.1739. Adding the present value of D1 and the present value of the dividends from the second year onwards gives the total value of the stock: $1.8261 + $40.1739 = $42. This is $6 more than the current price of $36, indicating the stock is undervalued by $6.

D0 = $150 You Assume a Growth Rate of 40% for the for the First