Problem
A team of analysts is using a two-stage variable growth model to estimate the value of ABCM's common stock. The most recent annual dividend paid by ABCM was $4 per share. The analysts expect dividends to increase 7% per year for the next 3 years and then drop to 3% starting in year 4 and remain at that rate for the forseeable future. The required Rate of Return used for the analysis is 8%.
i. What is the value of the stock attributable to the first 3 years of dividends. (Use the NPV function if possible.)
ii. What is the value of the stock at the end of year 3? (Use Constant-Growth Model if possible.)
iii. What is the value of the stock attributable to years 4 and beyond? (Use PV function, where answer to part C is the FV.)
iv. What is the total value of ABCM stock?