Question 1
Multiple ChoiceSuppose Ardmore Holdings announces it expects significant dividend growth over the next two years and plans to increase its recent USD2.00 dividend by 5% per year for the next two years. Following the high-growth period, dividends are expected to grow at a constant rate of 4% indefinitely. If Ardmore's required rate of return is 9%, what is the estimated current value of its stock?
Explanation
We are using a multi-stage dividend discount model:
D₀ = 2.00
Growth for 2 years: 5%
Long-term growth: 4%
Required return: 9%
Step 1: Forecast Dividends
D₁ = 2.00 × 1.05 = 2.10
D₂ = 2.10 × 1.05 = 2.205
D₃ = 2.205 × 1.04 = 2.2932
Step 2: Calculate Terminal Value at end of Year 2
Use the Gordon Growth Model for dividends from year 3 onward:
P _{2} = \frac{D_{3}}{r - g} = \frac{2.2932}{0.09 - 0.04} = 45.864
Step 3: Discount D₁, D₂, and P₂ to Present Value
Use BA II Plus:
2nd → CLR TVM
Cash Flow Mode:
CF0 = 0
C01 = 2.10
C02 = 2.205 + 45.864 = 48.069
NPV
I = 9
Compute NPV → ≈ 46.18