Multi-Stage Growth Model
(a) Union Pacific currently does not pay a dividend. You expect that the company will begin paying a dividend of $4 per share in 15 years, and you expect dividends to grow indefinitely at a 5.5% rate per year thereafter. If the required rate of return is 15 percent, how much is the stock currently worth?
(b) Fiat Chrysler Automobiles just paid a dividend of d0 = $1.10 per share. The dividends are expected to grow at a rate of 20 percent for the next six years and then level off to a 4 percent growth rate indefinitely. If the required rate of return is 12 percent, what is the value of the stock today?