A firm expects to make the following dividend payments over the next four years:
Year
One
Two
Three
Four
Dividend
$1.00
$2.55
$3.26
$4.99
This firm expects a more normal and reasonable growth of 4% in the years beyond the fourth year. Determine the price of the equity shares today if the required return is 12.75%.
Discuss the advantages of this model over the simpler Dividend Discount Model. Discuss methods used to determine the growth rate in dividends.