[$ 1.936(1.04)]/(0.12 - 0.04)


Now we enter the cash flows into our trusty calculator, noting that the total cash flow at time 6 is $1.936+ $25,168 = $27,104: CF0 = 0;C01 = 1.150; C02 = 1.323; C03 = 1.455; C04 = 1.600; C05 = 1.760; C06 = 27.104; I = 12; CPT -ยป NPV = 18.864.

According to the three-stage model, R&M is worth $18,864 today. This question is tedious, but it is not a question to be feared, as long as your calculator batteries hold up.

Example: Three-stage growth model with linear growth decline in stage 2

As an analyst, you have garhered the following information on a company you are tracking. The current annual dividend is $0.75. Dividends are expected to grow at a rate of 12% over the next three years, decline linearly to 4% over the next six years, and then remain at a long-term equilibrium growth rate of 4% in perpetuity. The required return is 9%. Calculate the value of the company.


Let s start by valuing the last two stages using the H-model. We know that:

D3 = D0(l + gs)3 = $0.75(1.12)3 = $1.0537 It follows that:

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