The correct answer is: A. PV of expected dividends.
The value of a stock with non-constant growth rate can be calculated using the Gordon Growth Model:
$P_0 = \dfrac{D_1}{r – g}$
where:
- $P_0$ is the current price of the stock
- $D_1$ is the expected dividend per share in the next year
- $r$ is the required rate of return
- $g$ is the long-term growth rate of dividends
The first step is to calculate the expected dividend per share in the next year, $D_1$. This can be done by looking at the company’s historical dividend payments and making an estimate of how much the dividends will grow in the next year.
The second step is to calculate the required rate of return, $r$. This is the rate of return that investors expect to earn on their investment in the stock. The required rate of return can be calculated using a number of different methods, such as the Capital Asset Pricing Model (CAPM).
The third step is to calculate the long-term growth rate of dividends, $g$. This is the rate at which the company’s dividends are expected to grow in the long run. The long-term growth rate can be estimated by looking at the company’s historical dividend growth rate and making an estimate of how much the dividends will grow in the future.
Once you have calculated $D_1$, $r$, and $g$, you can plug them into the Gordon Growth Model to calculate the value of the stock, $P_0$.
Here is a brief explanation of each option:
- Option A: PV of expected dividends. This is the correct answer. The first step in calculating the value of a stock with non-constant growth rate is to calculate the expected dividend per share in the next year, $D_1$. This can be done by looking at the company’s historical dividend payments and making an estimate of how much the dividends will grow in the next year.
- Option B: FV of expected dividends. This is incorrect. The FV of expected dividends is not used in the Gordon Growth Model.
- Option C: PV of intrinsic rate. This is incorrect. The PV of intrinsic rate is not used in the Gordon Growth Model.
- Option D: FV of intrinsic rate. This is incorrect. The FV of intrinsic rate is not used in the Gordon Growth Model.