Question

You own the stock of Pettersson and its current price is $36.00/share. It pays no dividend today. Based on your own research, you expect Pettersson to pay its first dividend of $2.50/share at the end of Years 1, 2, and 3 (12, 24, and 36 months from now). Given its performance outlook, you further expect the Board of Pettersson to increase the Year 4 dividend by 10% to $2.75; and then to increase it further by 4% annually for the next 2 years (end of years 5 and 6); after which it will grow by 2.0% annually forever. You enjoy a number of investment alternatives that will, on average, provide you with a 9% annual return. In light of this, should you buy more Pettersson stock at the current $36 price; or should you sell all your current Pettersson holdings for $36 and reinvest the proceeds elsewhere?

A. Sell for $36.00 because the intrinsic value is $34.78

B. Sell for $36.00 because the intrinsic value is $35.57

C. Buy for $36.00 because the intrinsic value is $37.75

D. Buy for $36.00 because the intrinsic value is $38.29

E. Buy for $36.00 because the intrinsic value is $38.72

Answer 1

The option C is correct.

In the below attached images, i calculated the intrinsic value using dividend discount model.

Kindly revert back if there are any issues.