Mission Industries Common Stock Value Calculator

Calculating the Value of Mission Industries Common Stock

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Question

An analyst with Smith, Kleen & Beetchnutty is examining shares of Mission Industries for possible investment. Due to the development of several new products, the growth of Mission Industries is expected to temporarily exceed its long-term rate of growth. Specifically, Mission Industries is anticipated to grow at an 18% annual rate for the next three years, then return to its long-term rate of growth of 13% per year.

The Company recently paid an annual dividend of $0.75, and similar investments have warranted a 14.5% per year rate of return.

Using the information provided, what is the value of Mission Industries common stock? Use the two-stage dividend growth rate model.

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Explanations

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A. B. C. D. E. F.

F

The multi-stage dividend discount model is a more realistic way of valuing fast-growing companies that pay dividends. With this model, it is necessary to estimate the above-average, or "supernormal," rate of growth, as well as the long-term rate of growth. Once these growth rates have been determined, they are used to calculate the anticipated annual dividends leading up to the point at which the growth rate decelerates to the long-run rate of growth.

Incorporating the given information into the two-stage dividend discount model will yield the following

P = {[$0.75 * 1.18) / 1.145] + [($0.885 * 1.18) / 1.31103] + [($1.04312 * 1.18) / 1.50112] + [($1.23088 *

1.13) / (.145 - .13)]/1.50112} which can further be developed into:

P = {$0.77293 + $0.79655 + $0.81998 + $61.77} = $64.16

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