Triton Inc., is expected to grow at a rate of 22 percent for the next five years and then settle...

Question:

Triton Inc., is expected to grow at a rate of 22 percent for the next five years and then settle to a constant growth rate of 6 percent. The company recently paid a dividend of $2.35. The required rate of return is 15 percent.

a. Find the present value of the dividends during the rapid-growth period if dividends grow at the same rate as the company.

b. What is the value of the stock at the end of year 5?

c. What is the value of the stock today?

Two-Stage Growth Model:

The two-stage growth model is a stock valuation model based on the discounted dividend method. In this model, a stock has a stage where dividend growth is non-constant and a stage where dividend growth is constant.

Answer and Explanation:

a. The present value of dividend during the rapid-growth period is:

  • {eq}\displaystyle \sum_{t=1}^{5}{\dfrac{2.35*(1 + 22\%)^{t}}{(1 + 15\%)^{t}}} = 14.08 {/eq}

b. The value of the stock at the end of year 5 is the present value of the dividends after year 5, which is given by:

  • {eq}\dfrac{2.35*(1 + 22\%)^5*(1 + 6\%)}{(15\% - 6\%)} = 74.80 {/eq}

c. The value of the stock today is the present value of the stock dividends during the rapid growth period and the present value of the price of the stock at the end of year 5, i.e.,

  • {eq}14.08 + \dfrac{74.80}{(1 + 15\%)^5} = 51.27 {/eq}

Learn more about this topic:

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The Dividend Growth Model

from Finance 101: Principles of Finance

Chapter 14 / Lesson 3
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