Using the one-year holding period and multiple-year holding period dividend discount model (DDM), calculate the change in value of the stock of Monster Burger
Place under the following scenarios. First, assume that an investor holds the stock for only one year. Second, assume that the investor intends to hold the stock for two years. Information on the stock is as follows:
The value of the stock if held for one year and the value if held for two years are, respectively:
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A. B. C. D.B
First, we need to calculate the required rate of return. When a stock's beta equals 1, the required return is equal to the market return, or 10.0%. Thus, ke=
0.10.Alternative: Using the capital asset pricing model (CAPM), ke= Rf+ Beta * (Rm"" Rf) = 4.5% + 1 * (10.0% - 4.5%) = 4.5% + 5.5% = 10.0%.
Next, we need to calculate the dividends for years 1 and 2.
Then, we use the one-year holding period DDM to calculate the present value of the expected stock cash flows (assuming the one-year hold).
Finally, we use the multi-period DDM to calculate the return for the stock if held for two years.
P0= [D1/ (1 + ke)] + [D2/ (1 + ke)2]+[P2/ (1 + ke)2] = [$2.75 / (1.10)] + [$3.03 / (1.10)2] + [$30.0 / (1.10)2] =$29.80.Note:since the growth rate in dividends, g, was equal to ke, the present value of next year's dividend is equal to last year's dividend (for periods 1 and 2). Thus, a quick calculation would be 2.5 * 2 + $30.00 /
(1.10)2 = 29.80.