posted by Lyra
What is the value of a stock that grows at a supernormal rate of 18% for the first four years, and then slows down to a constant growth rate of 10%? An annual dividend of $2.00/share was just paid, and the rate of return on common stock is 13%.
For a constant growth rate, we have:
V = D1/k-g
V = the value of the stock = ?
D1 = the dividend next period = $2.00
k = the required rate of return = 13%
g = constant growth rate = 10%
I'm confused on how to combine the constant growth rate formula with the supernormal growth rate of 18%.