Caskey inc. is experiencing a period of growth. Dividends are expected to grow at a rate...

Caskey inc. is experiencing a period of growth. Dividends are expected to grow at a rate of 13.00% for the next two years and 5.00% thereafter. Yesterday the corporation paid a dividend of $1.06. If the required rate of return is 8.00%, what is the intrinsic value of the stock?

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Expert Solution

D1=(1.06*1.13)=1.1978

D2=(1.1978*1.13)=1.353514

Value after year 2=(D2*Growth rate)/(Required return-Growth rate)

=(1.353514*1.05)/(0.08-0.05)

=47.37299

Hence intrinsic value=Future dividend and value*Present value of discounting factor(rate%,time period)

=1.1978/1.08+1.353514/1.08^2+47.37299/1.08^2

=$42.88(Approx)

jeff jeffy answered 2 years ago

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