Two-Stage Dividend Growth Models

Prepared by Pamela Peterson Drake

Practice Problems

For each of the following problems, calculate the value of a share of stock today.

Problem

Current dividend

D0

Growth rate of dividends for the first stage

g1

Growth rate of dividends for the second stage

g2

Length of the first stage of growth, in years

n1

Required rate of return

re

1

$2.5

10%

2%

3

7.5%

2

$1

20%

5%

3

9%

3 $1 10%

2%

3

9%

4

$1

>15%

5%

4

9%

Solutions