Question

Company A is current trading at $48.00 a share. Analysts are currently projecting the share price to be $52.50 next year. This year’s dividend was $2.88 and the company expects to grow future dividends by 4% a year.

      What would the expected rate of return be for Company A? ________________________

      If the discount rate is 10%, would there be any intrinsic value? _____________________

            If so, how much? _________________________

      If the discount rate is 20%, would there be any intrinsic value?

            If so, how much? _________________________

Answer 1

Facts Given :
Current Share Price (P0)	$48
Next Year Share Price (P1)	$52.50
Current Year Dividend (D0)	$2.88
Growth Rate of Dividend in Perpetuity (g)	4%
Expected Rate of Return (Ke)	???
Ke= D1/p0+ g
D1: D0+g =2.88(1.04)	2.9952
Expected Rate of Return (Ke)= 2.9952/48+4%	10.24%
Calculation of Intrinsic Value, if the discount rate is 10%
As per Gordon Growth Model which assume company in consideration
is within a steady state - i.e. growing dividend in perpetuity. It is expressed as the following:
Intrinsic Value of Stock : D1/ Re-g
D1: Expected dividend at the end of the year
Re: Required Rate of Return for Equity Investors
G: Annual Growth Rate of Dividend in Perpetuity
Intrinsic Value of Stock: 2.9952/ 0.10-0.04= 49.92
Intrinsic Value of Stock= $ 49.92
Calculation of Intrinsic Value, if the discount rate is 20%
Intrinsic Value of Stock : D1/ Re-g
D1: Expected dividend at the end of the year
Re: Required Rate of Return for Equity Investors
G: Annual Growth Rate of Dividend in Perpetuity
Intrinsic Value of Stock: 2.9952/ 0.20-0.04= 18.72
Intrinsic Value of Stock= $ 18.72