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2-stage Dividend Discount Model

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.

Solution Preview

Please refer to the attachment.
<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>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 ...

Solution Summary

2-stage Dividend Discount Model is listed.