Dividend growth model?

Question

Okay, so here is some info on a start up company...

-total after tax earnings $2million in 2006.
(25% paid as dividend, 75% retained for financing)
-Payout policy will remain unchanged for 2 years (incl. 2007), after which it will retain only 40% of after tax earnings.
-Company earnings will grow at a rate of 50% per yr starting now (beginning of 07') for a duration of 3 years.
-After which, company will grow at a rate of 8% per year forever after.
-Company's cost of equity = 15%.

Now- I need to use the Dividend growth model (as of jan 07') to find the value.

Also- I need to find the new value, assuming that the cost of equity during the high risk start up years (1 and 2) is really 20% and 15% thereafter...

Can anyone help?

Thanks!

Answer 1

Sure.

You need the present value of the dividends from 2007, 2008 and 2009. Then you will need the present value of the terminal value which is from 2010 forward.

So the first three pieces are:

Year Earnings Dividend PV
2007 3000000 750000 652,174
2008 4500000 1125000 850,662
2009 6750000 4050000 2,662,941

Then the terminal value is
62,485,714.29. Discounted back 3 years it is 41,085,371.44.

Adding up your present values give you an intrinsic value of $45,251,147.72 for the firm. If you have a # of shares outstanding, just divide the intrinsic value by shares outstanding to get a value per share.

Answer 2

The dividend boost kind, for my section, is barely appropriate if the corporation will pay out an substantial share of its loose funds flow interior this form of dividends. If the dividend payout is barely a fragment of the money flow available to pay out, then (assuming no buyback) the surplus funds would be used for reinvestment interior the corporation (optimistically to spur destiny boost), paying back debt or including to the money/investments on the soundness sheet. If purely a fragment of the available funds flow is paid out as dividends, then the dividend boost kind would frequently understate the authentic fee of the corporation, finding on what boost fee you utilize for destiny dividends. Theoretically, reinvesting funds flow interior the corporation would desire to boost the upward push fee of destiny funds flows and for this reason you ought to apply a a techniques better boost fee interior the dividend boost kind than if all funds flow became into paid out. the better boost fee would needless to say boost the implied fee of the inventory in accordance to the upward push kind, assuming which you maintain the comparable required return assumption. i'd say that i'd frequently purely use the dividend boost kind to well worth shares at the same time with REITs or utilities that pay out maximum of their available funds flow as dividends.