Valuation Assuming 2-Stages of Dividends

We can also use the dividend discount model when the firm's dividends change, which typically involves an initial period with higher dividend payments and a second period with lower dividend payments. To do this, we split the calculations up into two. In the initial period, we discount the higher dividend payments over the finite time period. In the second period, we use the Perpetuity with Growth formula to value the lower dividend payments into perpetuity. In this exercise, assume that the preferred stock pays a higher dividend rate of 10% form Year 1 to 5 or $2.50 per year (high_div). The relevant discount rate (kp) for Years 1 to 5 is 10%. The present value of the dividends from Year 6 onwards, which we calculated in the prior exercise, is stored in memory as pref_value_low. What is the value of this preferred stock?

Note: Since we add the value of an extra five years of cash flows, the value of the preferred stock in this example will be higher than the value of the preferred stock of $7.76 in the prior exercise.

Calculate preferred dividend during high dividend stage.
Add variable for the number of discount periods.
Calculate discount factors.
Calculate present value of the dividends for Years 1 to 5.
Calculate value during high dividend stage.
Add the value during high dividend stage to the value of the low dividend stage.

Take Hint (-30 XP)

Exercise

Valuation Assuming 2-Stages of Dividends

Instructions