In 2018, Audi AG paid its stockholders an annual dividend of €4.80 per share. A major brokerage firm recently put out a report on Audi predicting that the company’s annual dividends would grow at the rate of 5% per year for each of the next seven years and then level off and grow at 3% thereafter.
a. Use the variable-growth DVM and a required rate of return of 8.6% to find the maximum price you should be willing to pay for the stock.
b. Redo the problem in part a, this time assuming that after year 7, dividends stop growing altogether (for year 8 and beyond, assume g = 0). Use all the other information given to find the stock’s intrinsic value.
c. Contrast the two answers and comment on the findings. How important is growth to this valuation model?