Crane, Inc., is a fast-growing technology company. Management projects rapid growth of 30 percent for the next two years, then a growth rate of 17 percent for the following two years. After that, a constant-growth rate of 8 percent is expected. The firm expects to pay its first dividend of $2.93 a year from now. If dividends will grow at the same rate as the firm and the required rate of return on stocks with similar risk is 16 percent, what is the current value of the stock? (Round all intermediate calculations and final answer to 2 decimal places, e.g. 15.20.)
The dividend discount model (DDM) is a quantitative method used for predicting the worth} of a company's stock supported the idea that its contemporary price is definitely worth the add of all of its future dividend payments when discounted back to their present value. It makes an attempt to calculate the honest value of a stock regardless of the prevailing market conditions and takes into thought the dividend pay out factors and therefore the market expected returns.
Value of stock = D1 / (k - g)
where:
D1 = next year's expected annual dividend per share
k = the investor's discount rate or required rate of return,
g = the expected dividend growth rate (note that this is assumed to be constant)
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