0:59

And we have the stock prices over here.

Â So what happens is, that at low growth rate the prices are hardly being affected

Â and they suddenly jump up as the growth rates start to approach the required rate.

Â So that's really interesting, you can see that shareholders love growth rates and

Â they are willing to pay very high prices at height growth rates.

Â 1:28

Choice C is true.

Â Since all growth valuation models look at future dividends and

Â price and they never include the current dividends.

Â They've all ready been paid out to existing shareholders so you don't pay for

Â what you don't get.

Â And choice D and E are self explanatory.

Â Let's go to question number 2.

Â All of the choices here speak to shareholders rights and

Â are correct, except for choice D.

Â This statement is incorrect because stocks don't have a face value or

Â par value, nor do they ever mature.

Â 2:04

It takes us to question number three.

Â Here, we have statement A which is incorrect

Â because the Dow has only 30 stocks.

Â Statement B is also incorrect because the Dow is not a global,

Â but it's a U.S. Index.

Â Statement C is the correct response.

Â 2:48

It depends on which of the stocks went down within the index that forced

Â the whole index to go down.

Â More generally stock price decreases do not necessarily mean that you should sell.

Â You may want to wait.

Â Maybe a whole bunch of other decisions you take, so

Â we simply cannot take E as the correct statement.

Â Again, the correct answer is statement C.

Â 3:12

Here we are supposed to calculate the stock price three years down the road.

Â This is when the company starts to pay $2 per year indefinitely.

Â And it's at that point that we can apply the zero growth model.

Â You'll recall the zero growth model, which is the price is based on future earnings,

Â which are exactly equal to dividends and that is divided by the discount rate.

Â So it's a perpetuity we value it today by dividing it by the discount rate.

Â We have all the information we need in the problem.

Â Before we do apply the information, let's keep in mind in this particular case.

Â We are here in time zero.

Â And remember that the dividends only kick in three years from now.

Â Right.

Â So, we're really computing the price in year three and

Â that will look at next years dividend, which it doesn't matter because,

Â it's flat, it's a zero growth model.

Â So, you look at the dividend and then you divide it by R and

Â this price, let's not forget we need to present value back to today.

Â Right so then we apply this to a formula.

Â The dividend we know is $2 and the discount rate has been

Â provided to us 10% which give us a value of $20.

Â Let's not forget, this needs to be brought back to times zero, and

Â in order to do that we just have to take this value of 20 and bring it back,

Â present value for three years.

Â So that's 1 plus the discount rate raised to the power 3 and

Â that gives us the answer, which is $15.03.

Â And that corresponds to choice number e.

Â 5:02

Right. So that takes us to the next question,

Â number 5.

Â Here, where instead of using the zero growth model, we're going to use

Â the constant growth model, so we have this was the zero growth model.

Â Now we look at the constant growth model.

Â 5:17

And you recall the constant growth model to compute the price this time

Â we look at the next periods dividend, which is D1 and

Â divide that by the discount rate minus the growth rate.

Â Keeping in mind that D1, next years dividend is this years dividend,

Â D0 multiplied by one plus the growth rate.

Â 5:39

Now on a timeline, again, we can draw the information that we've

Â given in this particular case what do we have for constant growth,

Â we have time periods that continue on,

Â where this is D0, this is going to be next year's dividend, the following year's

Â dividend, the year after that, right until the dividend for period t.

Â Right?

Â And to compute the present value of all of these numbers

Â All we have to do is to use this particular formula here.

Â 6:20

So, what we have is the most recent dividend.

Â The most recent dividend is $1.40 and that's growing at 5%.

Â That's a growth rate

Â divided by the discount rate of 10%, minus the growth rate.

Â And that gives us a new price of $29.40.

Â 6:50

Okay for question number 6 we can see that this is a non-constant

Â growth problem because we have variable growths given in the problem.

Â So what we can do is set up a little visual for

Â us once again to see where the growth rates are changing.

Â So what we have in the problem is for two periods we have a growth rate.

Â Let's just put that over here.

Â Period one and period two.

Â We have a growth rate of 6% that's corresponding to this period here.

Â 7:21

And then from there on the growth rate dips down from here on to 3%, right.

Â So for period 3/4 or indefinitely were at 3%.

Â And, of course, we can compute the price at this point in time.

Â That would be P2, which of course would be

Â D3 using the constant growth of 3% divided by R minus G.

Â And then we would, of course, forecast the next period's divided,

Â 7:57

the following period's dividend, and bring this dividend back here,

Â and bring this dividend back here, along with this price.

Â That's really what we're trying to do in this problem.

Â Okay?

Â 8:10

What I've always recommended when you have different

Â variable growth rate is to use a three step procedure.

Â And that makes the visualization put very concretely into steps.

Â So let's do the steps.

Â The first step is to forecast the dividend until they become constant or zero growth.

Â So, that's step number one, let's do that.

Â Step 1.

Â 8:33

Forecast the dividends until there are zero or constant growth.

Â In this example we have dividends becoming constant in period two.

Â So we have to forecast d1 and we have to forecast d2.

Â Let's do that.

Â What is going to be dividend at the end of

Â 9:12

D2 is going to equal to D1 into 1+G, because the growth rate is the same,

Â we take this time 318 1 plus the growth rate and

Â we get 337 that's dividend for period two.

Â So we've really completed step one.

Â Step one is simply to forecast d1 and d2, and we have done that right here.

Â Let's do step 2.

Â 9:41

Step two is to compute the price at that point in time.

Â Which point is that?

Â Right over here, when the dividends become zero growth or constant growth.

Â We've all ready noted that the price at the end

Â of year two will depend on the following year's dividend divided by r minus g.

Â So that's what we're going to do here.

Â Calculate the price at the point where the growth rate becomes constant.

Â In this case, we look at the third period's dividend,

Â which is going to be d3, and divide that by r-g.

Â So, what is d3?

Â Well, d3 is going to obviously be d2 times 1 plus the growth rate.

Â In this example, d2 is 3.37, this is now going to grow,

Â note at 3%.

Â 1 plus the growth rate, that gives us the new rate of D3.

Â 10:37

Divide that by the discount rate that is given in the problem,

Â to be 16%, and notice we subtract now the constant growth rate of 3%.

Â And that will give us the answer for step two which is $26.71.

Â That is step two.

Â That takes us finally to step three.

Â Step three is simply the present value of steps one and two.

Â So we want to bring this dividend back as I mentioned, this dividend back and

Â this price back.

Â Those are the three things we want a present value instead of three.

Â So let's do that to present value leaves three amount.

Â 11:22

All we have to do is take the numbers which you see here.

Â We take the first number D1 which is 3.18,

Â bringing it back for one period at our discount rate of 16%.

Â We do that right here.

Â This is to compute remember, the price today.

Â 11:41

And then we bring the 2 and p2.

Â P2 we've computed the dividend for the second period is 337.

Â And we've computed the price, which is 26.71.

Â Bring these back for two periods.

Â