Valuation of stock through dividend model and growth model.

1. Calculate a 5-year annually compounded growth rate of dividends per share for MCD. Does the recent growth in MCD dividends conform closely to the model used in Question 3? Does the disparity raise questions in your mind about the growth assumption?

2. Suppose you believe that MCD will distribute cash only in the form of ordinary dividends in the future. Assume that MCD's EPS for the current fiscal year (i.e., Dec 2009, or year 0) is $4.00, and its dividend payout ratio is 50%. EPS growth is expected to be 9% for the next 5 years. The EPS growth rate is expected to decline linearly over the following 6 years to a stable growth rate of 3% (i.e., 8% in year 6, 7% in year 7, etc.). You estimate that MCD's stable ROE in 11 years will be 15%. Please assume an 8% cost of equity throughout the time horizon of the valuation.

3. Show explicitly the expected EPS growth rates, expected EPS, expected payout ratios, expected dividends per share (DPS), and DPS growth rates for fiscal years ending Dec 2010 - Dec 2021 (i.e., years 1 - 12).

4.  Comment as to how forecasted EPS and DPS growth rates compare over time. Why are the growth rates equal in some years while different in other years (explain what's going on)?

5.  Calculate the estimated terminal value of a share of MCD stock as of Dec 2019 (i.e., at the end of year 10).

6.  Calculate the estimated value of MCD's share price as of the end of Dec 2009.