Valuation Assuming No Dividends For First Few Years

Even if a firm does not pay dividends today, we could expect such firms to pay dividends in the future as the firm matures. Because of this, We can still use the dividend discount model. The idea here is that you discount what cash flows are available to the shareholder when they are available. Suppose the same company pays no dividends now until Year 5 (five years of no expected cash flows) but you expect that in Year 6 the company will begin to pay out dividends (i.e., you get cash flows from Year 6 onwards).

To value the firm, we would use a two-step procedure. First, use the same formula to value the preferred stock from the last exercise to value the preferred stock when it begins to pay dividends in the future. Note that using the formula in the previous exercise, when the cash flow begins in Year 6 you end up calculating a present value as of Year 5. Second, from that future date (Year 5), we discount the preferred stock value back to the present.

Assuming you own a preferred stock with a stated value (stated_value) of $25, dividend rate (div_rate) beginning in Year 6 of 5%, and cost of preferred equity (kp) of 10%, what is the value of the preferred stock today?

Calculate the Year 5 value of the stock.
Discount the Year 5 value to the present.

Exercise

Valuation Assuming No Dividends For First Few Years

Instructions