In: Finance
Krispy Kreme just paid a (annual) dividend of $1, which is expected to grow at 10% for two years and then at 4% thereafter. If the required return on Holliday Investments is 7.5%, what is the intrinsic value of Holliday Investments stock?
Calculation of Annual Dividend | |||||
Year | Calculations | Dividend | |||
0 | $ 1.0000 | ||||
1 | =1*1.1 | $ 1.1000 | |||
2 | =1.1*1.1 | $ 1.2100 | |||
3 | =1.21*1.04 | $ 1.2584 | |||
Let us calculate terminal value at year end 2 | |||||
Terminal Value at the end of year 2 = Year 3 Dividend / (required rate- growth rate) | |||||
=1.2584/(0.075-0.04) | |||||
=35.9543 | |||||
Calculation of stock price | |||||
Year | Cash Flow | PV Factor | PV Of Cash Flow | ||
a | b | c=1/1.075^a | d=b*c | ||
1 | $ 1.1000 | 0.93023 | $ 1.02 | ||
2 | $ 1.2100 | 0.86533 | $ 1.05 | ||
2 | $ 35.9543 | 0.86533 | $ 31.11 | ||
Stock Price | $ 33.18 | ||||