In: Finance
A stock just paid a dividend this morning of $1.30. Dividends are expected to grow at 14.00% for the next two years. After year 2, dividends are expected to grow at 8.06 % for the following three years. At that point, dividends are expected to grow at a rate of 6.00% forever. If investors require a return of 15.00% to own the stock, what is its intrinsic value?
D1=(1.3*1.14)=1.482
D2=(1.482*1.14)=1.68948
D3=(1.68948*1.0806)=1.82565209
D4=(1.82565209*1.0806)=1.97279965
D5=(1.97279965*1.0806)=2.1318073
Value after year 5=(D5*Growth rate)/(Required return-Growth rate)
=(2.1318073*1.06)/(0.15-0.06)
=25.1079526
Hence intrinsic value=Future dividend and value*Present value of discounting factor(rate%,time period)
=1.482/1.15+1.68948/1.15^2+1.82565209/1.15^3+1.97279965/1.15^4+2.1318073/1.15^5+25.1079526/1.15^5
=$18.44(Approx)