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    Stock valuation: Company ABC

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    Company ABC's earnings and dividends will grow at 6% during the next five years. Its growth will stop after year 5. In year 6 and afterward, it will pay out all earnings as dividends. Assume next year's EPS is $10 and the dividend is $5 and the market capitalization rate is 9%. What is ABC's stock price?

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    Solution Preview

    There are two phases - one for growth and one for no growth. We need to work out the Present Value for the two phases separately to get the answer.

    In the fist instance the dividend expected in year 1 is $5, growth rate is 6% and ...

    Solution Summary

    The solution explains how to calculate the stock price using the dividend discount model.