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an annual rate of 13％for the next three years。The growth rate is A firm is expected...

an annual rate of 13％for the next three years。The growth rate is A firm is expected to grow expected to decrease to 10％for the following two years and to be 4％thereafter forever。The last dividend paid（Do）is 243.00。Dividends are paid at the end of each year。The required rate of return is 14％，Find the intrinsic value of the common share。Drawing a diagram will help you to organize the information。

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Expert Solution

Question ask for Intrinsic value of the share.

Diagram for given information is as:

Year 0 1 2 3 4 5 Afterwards
Dividend D0=243 D1=243x1.13 =274.59 D2 = 274.59x1.13 =310.2867 D3= 310.2867x1.13=350.6240 D4= 350.6240x1.10=385.6864 D5=385.6864*1.10=424.2550
Growth g=13% g=13% g=13% g=10% g=10% g=4%

Required rate of return = 14%

1. Intrinsic vle of the share is the present value of the future dividends discounted at required rate of return.

Since dividens will grow contant after 5 years at contant rate till perpetuity. so we need to calculate the pv of perpetuity at time 4 by using gordan growth formula.

GGn formula =

ABove formula is to calculate the price at Time 0 so for value at time 4.

Replace P0 with P4, D1 with D5.

D5 = 424.2550 , Ke= 14% , Growth =4%

Put values in formula

= 424.2550 / ( 0.14 - 0.04)

= 424.2550 / (0.10)

Price at time 4 = 4242.55

2. Now calculate the prsent value of Dividends 1 to 4 along with the price at 4.

PV =

= 240.8684 + 238.7555 + 236.6612 + 228.3573 + 2511.9302

= 3456.5726

Intrinsic value of the share = 3456.5726

jeff jeffy answered 2 years ago
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