JAD’s stock price today can be calculated using the three-stage model. Start by finding the value of the dividends for the next four years with the two different dividend growth rates.
D1 = D0(1+g) = $0.80(1.25) = $1.00
D2 = D1(1+g) = $1.00(1.25) = $1.25
D3 = D2(1+g) = $1.25(1.15) = $1.4375
D4 = D3(1+g) = $1.4375(1.15) = $1.6531
(Alternatively, you could use your financial calculators to solve for the future value to find D1, D2, D3, and D4.)
Next find the value of the stock at the beginning of the constant growth period using the constant dividend discount model:
The easiest way to proceed is to use the NPV function in the financial calculator.
CF0 = 0; CF1 = 1.00; CF2 = 1.25; CF3 = 1.4375; CF4 = 1.6531 + 40.57 = 42.22
I = 12.4; NPV = 29.34
The value of the firm today is $29.34 per share.
