Hi! For this problem, I am using The Walt Disney Company (DIS) and you can see the work I have so far. Can you please tell me if I am on the right track? I am not sure how to use the Geometric Dividend Growth Rate to calculate the price.

Choose a company that pays a yearly dividend. What is the current yearly dividend? What is the Geometric Dividend Growth Rate for the past 5 years? What would you consider to be an acceptable rate of return on this stock, calculate using the CAPM formula? Is the Dividend growth rate sustainable? Utilizing the Dividend growth rate calculation, what should be the current price? Based on this assumption, and its current stock price, would you invest?

The Walt Disney Company (DIS) last paid an annual dividend in December 2014 of $1.15. Five years prior to that, it paid an annual dividend of $0.35 in December 2009. The Geometric Dividend Growth Rate can be calculated by dividing the current dividend by the dividend paid five years ago, raising that quotient to the 1/5 power and subtracting 1. See below:

g = (1.15/0.35)^1/5 1 = 0.2686036576 x 100 = 26.86%

Rate of Return = Risk Free Rate (Market Risk Premium)(Beta)

= 2.482% - (12 2.482%)(1.44)

= 34.01%

The Geometric Average Dividend Growth Rate is based on a geometric average of historical dividends. In the case of The Walt Disney Company (DIS), this rate is 26.86%. By definition, in order for this growth rate to be sustainable, it must be able to be sustained by a companys earnings. The Sustainable Growth Rate for The Walt Disney Company can be calculated as follows:

Sustainable Growth Rate = ROE x Retention Ratio

= 19.65% x (1 50.32%)

= .1965 x (1 - .5032)

= 0.0976212 = 9.76%

Therefore, the company can grow at a rate of 9.76% using its own earnings and still remain sustainable. If the company grows above this rate, it may need to seek outside financing.

In order to calculate the current price based on the dividend growth rate, one can plug the dividend growth rate into the Dividend Discount Model. See below:

P₀ = D₁/r-g

^^^Is this right?