Timber Company's current market price per share at the end of 2016 is $48 while dividends per share during 2016 is $1.08
1. Kara says that 11% is the required rate of return and the projected growth rate will be 8%. Using constant growth DDM, calculate for the value of Timber Company's stock and compare the computed value to Timber Company’s current stock price.
2. Kara says that a two-stage DDM may be more appropriate for this situation and that she believes Timber Company could grow more rapidly for the next 3 years and then settle in a lower but sustainable growth rate beyond 2019.
Growth Rate for the next three years (2017, 2018, 2019) is 13% then growth rate after 2019 is 7%. Kara tells you to use 11% as the stockholders’ required rate of return, compute the two-stage DDM value of Timber Company's stock and then comment on its current market price (2016).