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Supernormal Growth Stock Valuation

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Taussig Technologies Corporation (TTC) has been growing at a rate of 20% per year in recent years. This same supernormal growth rate is expected to last for another 2 years (g1 = g2 = 20%).

a.) If D0 = $1.60, rs = 10%, and gl = 6%, then what is TTC's stock worth today? What is expected dividend yield and its capital gains yield at this time?

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Solution Summary

The solution explains how to calculate the price of a stock with supernormal growth

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The worth of the stock is the present value of dividends. Dividends grow at 20% for 2 years and then at 6%
D1 = 1.60 X 1.20 = 1.92
D2 = 1.92 X 1.20 = 2.304
D3 = 2.304 X 1.06 ...

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