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a firm is expected to make four dividend payments of 1.30. Then dividends are expected to...

a firm is expected to make four dividend payments of 1.30. Then dividends are expected to stop for 2 periods. at that point the stock has a forecasted EPS of $24.40 and PE ratio of 11.2. if the required return of the stock is 15%, what is its intrinsic value? Answer is 106.52. Show step by step work please

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Expert Solution

The intrinsic value of the stock is equal to the present value of future cash flows (Dividends + price in year 7)

D1 = 1.30

D2 = 1.30

D3 = 1.30

D4 = 1.30

D5 = 0

D6 = 0

r = 15%

The present value of the dividends = 1.30/(1 + 0.15)^1 + 1.30/(1 + 0.15)^2 + 1.30/(1 + 0.15)^3 + 1.30/(1 + 0.15)^4

The present value of the dividends = 1.1304347826 + 0.9829867675 + 0.8547711022 + 0.7432792193

The present value of the dividends = $3.7114718716

EPS = 24.40

PE = 11.2

Price in year 7 = EPS * PE

Price in year 7 = 24.40 * 11.2

Price in year 7 = $273.28

The present value of the price in year 7 = 273.28/(1 + 0.15)^7

The present value of the price in year 7 = 273.28/2.6600198805

The present value of the price in year 7 = $102.736074269

The intrinsic value of the stock = The present value of the dividends + The present value of the price in year 7

The intrinsic value of the stock = 3.7114718716 + 102.736074269

The intrinsic value of the stock = 106.4475461406

The intrinsic value of the stock = $106.45

The intrinsic value is very close to $106.52 (It is slightly off may be due to rounding error, but this is the process to calculate the intrinsic value)

Can you please upvote? Thank You :-)

jeff jeffy answered 2 years ago
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