Purchase Solution

2-stage Dividend Discount Model

Not what you're looking for?

Ask Custom Question

Using 2-stage DDM and CAPM to value stocks:

Beta of company: 1.15
Market price: $30
Intrinsic value: ?
Risk-free rate 4.50%
Expected market return: 14.5%

EPS and dividend growth rates for first 3 years: 12% per year
EPS and dividend growth rates thereafter: 9% per year

Estimate the intrinsic value oif the company using the data and the 2-stage dividend discount model.

Purchase this Solution
Solution Summary

2-stage Dividend Discount Model is listed.

Solution Preview

Please refer to the attachment.
<br>
<br>Start with the CAPM:
<br>Expected rate of return of the company is
<br>K= Rf + beta (Rm - Rf)= 4.5+1.15*(14.5-4.5)=16%
<br>
<br>Since we are going to use the 2-stage dividend discount model, here one key information is missing: the current dividend value D0.(or even the dividend payout ratio will ...

Purchase this Solution
Free BrainMass Quizzes
MS Word 2010-Tricky Features

These questions are based on features of the previous word versions that were easy to figure out, but now seem more hidden to me.

Understanding Management

This quiz will help you understand the dimensions of employee diversity as well as how to manage a culturally diverse workforce.

Organizational Behavior (OB)

The organizational behavior (OB) quiz will help you better understand organizational behavior through the lens of managers including workforce diversity.

Basic Social Media Concepts

The quiz will test your knowledge on basic social media concepts.

Understanding the Accounting Equation

These 10 questions help a new student of accounting to understand the basic premise of accounting and how it is applied to the business world.

View More Free Quizzes
Related BrainMass Solutions

  • Sundanci, INC.

    157730 Calculating current value of share by using two-stage dividend discount model Helen Morgan, CFA, has been asked by Carroll to determine the potential valuation for Sundanci, INC., using the dividend discount model.

  • Evaluation of a company: three-stage dividend growth model with declining growth

    16196 Evaluation of a company: three-stage dividend growth model with declining growth I am evaluating a firm using the three-stage dividend growth model with a linearly declining growth rate in Stage 2.

  • Two Stage Dividend Growth Model

    It is currently trading for $179.90. 1) Use the two-stage dividend discount model to determine the current intrinsic value for IBM given these assumptions.Is the stock overvalued or undervalued?

  • Portfolio construction

    Utilizing the discount model, here is how it stacks up: 1) Why three-stage? Coca Cola still has high growth in beverages which looks like it may last for about 5 years. The transition period will last another 5 years. 2) Why dividends?

  • Two-Stage Dividend Growth Model

    We then discount these cash flows at 11%. The price of stock comes to $92.42 The solution explains how to calculate the stock price using the two-stage dividend growth model

  • Stock Price

    The solution explains the calculation of stock price using the 2-stage dividend discount model.

  • Stock Value

    Here since the growth rate is different for 2 periods, we will have to use the 2 stage model. In this we find the PV of dividends for 7 years when they are growing at 19% and then the PV of dividends at the long run stable growth rate.

  • Intrinsic Value

    We use the two stage dividend discount model. We assume that 26.22% will be there for 5 years and then the growth rate will be 5%.

  • Finance scenarios; stock prices

    A firm pays a $3.80 dividend at the end of year one (D1), has a stock price of $50, and a constant growth rate (g) of 4 percent. Compute the required rate of return (Ke). Use the dividend discount model to get the required return.

View More Related Solutions