Two-Stage Dividend Growth Models: Solutions to Practice Problems

Inputs:

Problem

Current
dividend

D0

Growth rate for
the first stage

g1

Growth rate for
the second stage

g2

Length of the first stage of growth,
in years

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%

Prices:

Problem

Price

1

$57.53

2

$38.67

3

$18.03

4

$37.11

Cash flows used in the calculations:

Problem

CF1

CF2

CF3

CF4

1

$2.750

$3.025

$3.328 + 61.710 = $65.038

 

2

$1.200

$1.440

$1.728 + 45.360 = $47.088

 

3

$1.100

$1.210

$1.331 + 19.395 = $20.726

 

4

$1.150

$1.323

$1.521

$1.749 + 45.911 = $47.66

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