Value of Common Stock

C

The Multiple Holding Period form of the Dividend Discount Model takes the following form: {V = {[d1 / (1 + k)] + [d2 / (1 + k)^2] + ... .[dn / (1 + k)^n] + [Pn / (1 + k)

^n]}

Where: V = the price of the common stock at t0, d1 = the annual dividend at t1 (this is found by multiplying the annual dividend at t0 by (1 + the anticipated growth rate), d2 = the annual dividend at t2 (this is found by multiplying the dividend at t1 by (1 + the anticipated growth rate), k = the required rate of return, n = period

"n", and Pn = the sale price of the common stock at time "n".

In this example, time "n" is the fourth year, as this is the end horizon for the investor's holding period. Had the investor in this example forecasted selling the shares at the end of the 10th year, then "n" would be the tenth year.

Now that the formality of expressing the equation for this form of the DDM has been carried through, we can move toward a calculation of the value of this common stock. In this example, all of the necessary information has been provided, and the calculation of the value of this retail stock is as follows:

{V = [( $0.45* 1.125) / (1 + 0.15)^1] + [($0.50625* 1.125) / (1 + 0.15)^2] + [($0.56953 * 1.125) / (1 + 0.15)^3] + [($0.640723 * 1.125) / (1 + 0.15)^4] + [ $28/ (1 +

0.15)^4]}

which becomes

{V = [$0.440217 + $0.430647 + $0.421285 + $0.412127 + $16.00909] = $17.71