Problem: A relatively new firm has the dividend payment history shown in Table. Suppose this stock sells for $8 per share. Estimate the shareholders' required rate of return using the dividend discount model with the following:
1) The dividend growth rate calculated over the firm's entire history.
2) The growth rate calculated over the actual dividend paying history only.
Why are the two answers different? Which do you think is most meaningful?
TABLE
Year Dividends Paid
2000 $0
2001 0
2002 0
2003 0
2004 0.10
2005 0.13
2006 0.15
2007 0.18