Dalton Detail (DD) is expected to experience nonconstant growth of 30% for the next 3 years. However, beginning with the fourth year, Dalton Detail should attain an 8% growth rate that it will sustain thereafter. The most recent dividend (D0) was $1.15 per share. Investors require a 13.4% rate of return on Dalton Detail’s stock (which is used to discount cash flows).
1. Determine the expected stream of dividends during the nonconstant growth period. The dividends for this stock are predicted to grow at a steady 30%, (i.e. g=30%).
D0 = $1.15
D1 = D0(1 + g) = $1.15 (1 + 0.30) = $1.4950
D2 = D1(1 + g) = $1.495 (1.30) = $1.9435
D3 = D2(1 + g) = $1.9435 (1.30) = $2.5266
****After D3 has been paid at Time 3, the stock becomes a constant growth stock (g=8%). Calculate the expected dividend at the end of the first year of constant growth that will be used later to calculate the stock price.
D4 = D3(1 + g) = $2.5266 (1.08) = $2.7287
2. Discount the expected dividends during the nonconstant growth period at the investor’s required rate of return (R=13.4%) to find their present value. (Please answer this question)
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Year: 0 1 2 3
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Dividend: D1 = 1.4950 D2 = 1.9435 D3 = 2.5266
