P7-15: Common stock value: Variable growth Lawrence Industries’ most recent annual dividend was $1.80 per share (D0=$1.80), and the firm’s required return is 11%. Find the market value of Lawrence’s shares when: a. Dividends are expected to grow at 8% annually for 3 years, followed by a 5% constant annual growth rate in year 4 to infinity. b. Dividends are expected to grow at 8% annually for 3 years, followed by a 0% constant annual growth rate in year 4 to infinity. c. Dividends are expected to grow at 8% annually for 3 years, followed by a 10% constant annual growth rate in year 4 to infinity.

a. Dividends are expected to grow at 8% annually for 3 years, followed by a 5% constant annual growth rate in year 4 to infinity.

D₀ = $1.80

D₁ = $1.944

D₂ = $2.10

D₃ = $2.2675

D₄ = $2.38

terminal value at year 3 = $2.38 / (11% - 5%) = $39.68

current P₀ = $1.944/1.11 + $2.10/1.11² + $41.9484/1.11³ = $1.75 + $1.70 + $30.67 = $34.12

b. Dividends are expected to grow at 8% annually for 3 years, followed by a 0% constant annual growth rate in year 4 to infinity.

D₀ = $1.80

D₁ = $1.944

D₂ = $2.10

D₃ = $2.2675

D₄ = $2.38

terminal value at year 3 = $2.38 / 11% = $21.6364

current P₀ = $1.944/1.11 + $2.10/1.11² + $23.90/1.11³ = $1.75 + $1.70 + $17.48 = $20.93

c. Dividends are expected to grow at 8% annually for 3 years, followed by a 10% constant annual growth rate in year 4 to infinity.

D₀ = $1.80

D₁ = $1.944

D₂ = $2.10

D₃ = $2.2675

D₄ = $2.38

terminal value at year 3 = $2.38 / (11% - 10%) = $238

current P₀ = $1.944/1.11 + $2.10/1.11² + $240.2675/1.11³ = $1.75 + $1.70 + $175.68 = $179.13