Question 52: Marksaltron Technology Is Expecting A Period

Question 52 5 7 Marksaltron Technology Is Expecting A Period Of

Question 52 5 7 Marksaltron Technology is expecting a period of high growth and has decided to reduce its annual dividend by 10% a year for the next three years. After that, it will increase the annual dividend by 6% per year for two years, followed by 7% per year for another two years and then it expects to maintain a constant growth of 5% per year. Altron recently paid $1.80 dividend per share and investors require 13% return.

a. Draw a timeline showing the expected dividends of Altron.

b. Calculate the value of Altron’s share.

Paper For Above instruction

The assessment of a company's valuation, especially in a high-growth phase, is pivotal for investors and managers alike. Using dividend discount models (DDM), particularly the multi-stage growth model, allows for an accurate estimation of a stock's intrinsic value by factoring in varying growth rates. This paper applies such a model to Altron Technology, which is experiencing a multi-phase dividend growth pattern, to determine its current share price based on forecasted dividends and required rates of return.

Introduction

Valuing a company's stock requires an understanding of its future dividend pay-outs and the associated risk profile. High-growth companies like Altron often exhibit complex dividend trajectories, necessitating multi-stage valuation models. The dividend discount model (DDM), especially the Gordon Growth Model in its multi-stage form, provides a structured approach to account for different growth phases, enabling more precise valuation compared to a single-growth assumption.

Part A: Drawing the Dividend Timeline

The dividend timeline visually represents the expected dividends for each year across the different growth phases. Starting with a recent dividend of $1.80, the dividend will decrease by 10% annually for three years, then increase by 6% for two years, 7% for the subsequent two years, followed by a constant growth of 5% thereafter.

Year 0 (today): D0 = $1.80

Years 1-3 (high growth decline):

• Year 1: D1 = $1.80 × (1 - 0.10) = $1.62
• Year 2: D2 = D1 × (1 - 0.10) = $1.62 × 0.90 = $1.458
• Year 3: D3 = D2 × (1 - 0.10) = $1.458 × 0.90 = $1.3122

Years 4-5 (growth of 6%):

• Year 4: D4 = D3 × (1 + 0.06) = $1.3122 × 1.06 ≈ $1.391
• Year 5: D5 = D4 × 1.06 ≈ $1.477

Years 6-7 (growth of 7%):

• Year 6: D6 = D5 × 1.07 ≈ $1.582
• Year 7: D7 = D6 × 1.07 ≈ $1.692

From Year 8 onward (constant 5% growth):

• Year 8 dividend: D8 = D7 × 1.05 ≈ $1.776

This timeline provides a clear visual sequence of dividends, from the initial reductions to sustained steady-state growth.

Part B: Calculating the Share Value

The valuation involves calculating the present value (PV) of the dividends across all phases, including the terminal value starting from Year 8 where dividends grow at a constant rate of 5%. The approach entails three steps:

1. Calculate the PV of dividends during the high-growth phases (Years 1-3). This involves discounting each dividend back to the present using the required return of 13%.
2. Calculate the PV of dividends during the subsequent growth phases (Years 4-7). Same discounting applies, but with different growth rates.
3. Calculate the terminal value at the end of Year 7, which represents all future dividends beyond Year 7, assuming perpetual growth of 5%. The terminal value is discounted back to today for total valuation.

Step 1: Present Value of Dividends for Years 1-3

Using the formula PV = Dt / (1 + r)^t:

• PV of D1: $1.62 / (1.13)^1 ≈ $1.434
• PV of D2: $1.458 / (1.13)^2 ≈ $1.142
• PV of D3: $1.3122 / (1.13)^3 ≈ $0.927

Step 2: Present Value of Dividends for Years 4-7

Calculating each dividend first:

• D4 ≈ $1.391
• D5 ≈ $1.477
• D6 ≈ $1.582
• D7 ≈ $1.692

Then discounting each back to present:

• PV of D4: $1.391 / (1.13)^4 ≈ $0.921
• PV of D5: $1.477 / (1.13)^5 ≈ $0.823
• PV of D6: $1.582 / (1.13)^6 ≈ $0.737
• PV of D7: $1.692 / (1.13)^7 ≈ $0.662

Step 3: Calculating Terminal Value at Year 7

The terminal value is based on the Gordon Growth Model:

TV at Year 7 = D8 / (r - g) = D7 × (1 + g) / (r - g) = $1.692 × 1.05 / (0.13 - 0.05) ≈ $1.776 / 0.08 ≈ $22.20

This terminal value must be discounted back to today:

PV of Terminal Value = $22.20 / (1.13)^7 ≈ $8.70

Final Calculation of Share Value

Summing all discounted dividends and the discounted terminal value gives the intrinsic value per share:

Value = PV (Dividends Years 1-3) + PV (Dividends Years 4-7) + PV (Terminal Value)

= ($1.434 + $1.142 + $0.927) + ($0.921 + $0.823 + $0.737 + $0.662) + $8.70 ≈ $3.503 + $3.143 + $8.70 ≈ $15.34

Therefore, based on the dividend discount approach, the intrinsic value of Altron's stock is approximately $15.34 per share, which investors can compare against the current trading price to inform investment decisions.

Conclusion

The multi-stage dividend discount model effectively captures the company's anticipated high growth phases transitioning into stable, perpetual growth. This comprehensive valuation indicates that Altron's stock value lies around $15.34, providing insight into whether the current market price aligns with intrinsic worth. Such models are integral in equity valuation, especially for firms with non-constant growth trajectories.

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