STOCK
Growth Cycles
LIFE CYCLE
Quick Constant Slow
Growth Cycles
LIFE CYCLE
Supernormal
How do we figure out the present value of a company’s Supernormal Stock?
Don’t have any questions that can determine the value of stock when growing at big or uneven rates
We can only use the Constant Growth Formula
Predict when stock will grow at constant rate
Figure out its value then
Discount value back to today’s prices
Add present values of dividends during supernatural period
Supernormal Growth
1. PV of Dividends
Figure out the Value of the Dividends
2. Apply Constant Growth Formula
Dn+1 Value at end of high growth same as value of beginning of normal growth
Use constant growth formula and the stock’s first dividend when it returns to normal
Ks Required rate of return for
G Constant growth rate
3. Discount Normal Growth Value
Discount Value of stock to present day using PVIF: Present Value Interest Factor based on years it took to get back to:
Current Market Discount Rate
4. Discount supernormal Dividends
Add dividends to PV of normal growth
Discount the dividends from supernormal period and add them to present value of the stock
Supernormal Growth
1. PV of /dividends
2. Apply Constant Growth Formula
3. Discount Normal Growth Value
4. Discount Normal dividends
Add Dividends to PV of Normal Growth
Growth
Year 1 20%
Year 2 20%
Year 3 7%
Year 4 7%
Required Rate of Return: 10%
Dividend: $2
How do you figure the Present Value of the price of the stock?
Step 1: Present Value of differential Growth
Establish the Value of the dividends over the first 3 years
Why 3 years?
Need the 3rd year for the rest of the equation.
The dividend is the first one that appears in the 7% normal rate.
Year 0= $2.00
Growth= 20%
Year 1=$2.40
Year 1= $2.40
Growth= 20%
Year 2=$2.88
Growth Returns to normal.
Year 2 (1+ 7%)
Year 2 (1.07)
$2.88 (1.07)
Year 3= $3.08
Step 2: Constant Growth Formula
Step 3: Discount the Normal Growth Value
Discount with PVIF [2, 10%]
102.67(PVIF [2, 10%])
102.67(0.8265)
102.67(0.8265) = 84.86
Step 4: Discount Supernormal Dividends
PVIF [Period, 10%]
Dividend (PVIF [Period, 10%])
Year 1: 2.40 (PVIF [1, 10%])
Year 1: 2.40 (0.9091) = $2.18
Year 2: 2.88 (PVIF [2, 10%])
Year 2: 2.88 (0.8264) = $2.38
Present Value: Pizza Coli’s
Supernormal Stock
DIV (1) = $2.18
+ DIV (2) = $2.38
+ Normal g =$84.86
Dividends
$89.42
Total Present Value
Pizza Coli’s
Supernormal Stock
$89.42
Present value of a Bond
Determine By:
PVIFA (Of coupon payments) + PVIF (of final sale Price)
PVIF
Present Value Interest Factor
PVIFA
Present Value Interest Factor of an Annuity
Stocks
“EASY”
IF: Dividends are growing at a constant rate
THEN: Use Constant Growth Model
IF: Irregular or Differential Growth
THEN: Figure Present value of individual dividends and when normal Use the Constant Growth Model Again
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