Investing Basics

Valuating Stocks - Dividend Growth Model Timeline 2

Coco Corporation just paid a dividend of $4.50 per share. The following is a timeline of the dividend history of the corporation:

|0______|1_______|2______|3______|4______|5______|6______|7______|

Dividend Growth Graph

Here's a graphical representation of the Dividend Growth:

Step 1

In Step 1, we find P6 which is the stock price in the 6th Year. But first, we must find the growth rate from years 6 - 7:

Growth Rate Years 6 - 7 = (7.47 - 6.94 / 6.74) = 7.64%

P6 = D7 / (re - g)
P6 = 7.47 / (0.12 - 0.0764)
P6 = 7.47 / 0.0436
P6 = $171.33 (stock price in Year 6)

Step 2

Now we calculate the stock price in Year 3 using D4, D5, D6 and P6.

In your Financial Analyst BAII Plus Calculator:

2nd -> CF

CFO = 0
CO1 = 6.01
CO2 = 6.46
CO3 = 6.94 + 171.33 = $178.27
I = 11%, NPV = ?
NPV = $141.01

Step 3

In step 3, we calculate the current stock price using D1, D2, D3 and P3.

In your Financial Analyst BAII Plus Calculator:

2nd -> CF

CFO = 0
CO1 = 4.84
CO2 = 5.2
CO3 = 5.9 + 141.01 = $146.91
I = 10%, NPV = ?
NPV = $119.07