Valuing Ordinary Shares with constant growth model

[melissa*k]

Hi I am reall stuck on this question.

company A has invested in a new machine The company has decided that for the next two years that it will reinvest all its earnings from other company products into rolling out the new product. Earnings per share were $2 in the past year and have been growing at an average rate of 9%. At the end of year 3, the company will begin paying a dividend per share of $2.50. This dividend is expected to grow very quickly at a rate of 30% in years 4 and 5 while the company still has a monopoly in the market. The rate of dividend growth, however, is expected to slow in year 6 to 20% and in year 7 to 10% until finally, in year 8, growth is expected to be a more normal constant growth of 4% as competitors develop and begin marketing alternative products. This required return company A shares is estimated to be 15% and company A shares are currently trading at $21.05.

I am not sure where to begin and what formula to use to answer this question (I think it is the non constant growth) but not sure how i should record the two years with no reeturns? any help would be appreciated thanks

 

[Nino MMP]

.To answer this question, you will need to use the Gordon Growth Model formula. This formula allows you to calculate the present value of a stock with non-constant growth. The Gordon Growth Model formula is as follows: P = D/(r-g)Where P is the current price of the stock, D is the dividend per share, r is the required rate of return, and g is the growth rate of the dividend.For this problem, P = 21.05, D = 2.50, r = 15%, and g = 9%, 0%, 30%, 20%, 10%, 4% for years 1-8 respectively. You can then plug these values into the formula to calculate the present value of the stock.