A stock just paid a dividend this morning of $1.30. Dividends are expected to grow at...

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?

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Expert Solution

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)

jeff jeffy answered 2 years ago

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