Question

The Group has been growing at 15% per yr in recent yrs. This expected to last for 3 more years. After 3 years, the growth rate is expected to decline to 4% indefinitely. The last dividend (paid yesterday) is $1.6 and the required return on the firms equity is 10%, whats the intrinsic value of the firms stock today? show work

Instead the growth rate of 15% is expected to remain for the next 4 yrs and then level off to 6% for yrs 5,6,7. Therefore, dividends are expected to grow by 2% per yr indefinitely. what wouldbe the value of the stock today if the last div was 1.6? show work

Answer 1

(1)

Year	Previous Dividend	Growth	This Year Dividend	Terminal Value	Cash Flow	DF @10%	PV
1	$                          1.60	15%	$                          1.84	$                        -	$                   1.84	0.9091	$       1.67
2	$                          1.84	15%	$                          2.12	$                        -	$                   2.12	0.8264	$       1.75
3	$                          2.12	15%	$                          2.43	$                        -	$                   2.43	0.7513	$       1.83
3rd year end Terminal Value	$                               -	0%	$                               -	$                 42.18	$                 42.18	0.7513	$    31.69
					Intrisic Value		$    36.94
Calculation of the Terminal Value using the Gordon's Growth Method
Value = {D3 x (1+g)} / (ke-g)
Value = {2.4334 x (1+0.04)} / (0.10-0.04)
Value = (2.4334 x 1.04) / 0.06
Value = $42.18

(2)

Year	Previous Dividend	Growth	This Year Dividend	Terminal Value	Cash Flow	DF @10%	PV
1	$                          1.60	15%	$                      1.8400	$                        -	$                   1.84	0.9091	$       1.67
2	$                          1.84	15%	$                      2.1160	$                        -	$                   2.12	0.8264	$       1.75
3	$                          2.12	15%	$                      2.4334	$                        -	$                   2.43	0.7513	$       1.83
4	$                          2.43	15%	$                      2.7984	$                        -	$                   2.80	0.6830	$       1.91
5	$                          2.80	6%	$                      2.9663	$                        -	$                   2.97	0.6209	$       1.84
6	$                          2.97	6%	$                      3.1443	$                        -	$                   3.14	0.5645	$       1.77
7	$                          3.14	6%	$                      3.3330	$                        -	$                   3.33	0.5132	$       1.71
7th Year Terminal Value	$                               -	0%	$                               -	$                 42.50	$                 42.50	0.5132	$    21.81
					Intrisic Value		$    34.30
Calculation of the Terminal Value using the Gordon's Growth Method
Value = {D7 x (1+g)} / (ke-g)
Value = {3.3330 x (1+0.02)} / (0.10-0.02)
Value = (3.3330 x 1.02) / 0.08
Value = $42.50