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Dividend Growth Model FINA 635A Managerial Finance Nisan Langberg Stock valuation and the implied growth rate In order to evaluate whether Netflix is an overpriced stock you are asked to estimate the growth in earnings that investors expect. Suppose that Netflix will experience a fixed (short-term) growth rate for the next 10 years and during this time will continue not to pay dividends. Its first dividend will be 10 years from now. At that time it will payout 60% of earnings as dividends and its long-term dividend growth rate will be 3.7%. Netflix’s equity cost of capital is 8.5%. Analysts forecast an expected growth rate in earnings for Netflix of 23% for the next ten years. Is the current stock price consistent with this estimate of analysts? What is the implied short-term growth rate of Netflix? Notice the current stock price provided below and the current EPS for 2016. The growth rate in EPS for the next ten years is what we are looking for. Financial data
