Krispy Kreme just paid a (annual) dividend of $1, which is expected to grow at 10%...

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?

Expert Solution

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

jeff jeffy answered 3 years ago

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