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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 12.00% for the next two years and 5.00% thereafter. Yesterday the corporation paid a dividend of $1.15. If the required rate of return is 8.00%, what is the intrinsic value of the stock?

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Expert Solution

Year Growth rate Dividend computation Dividend PV factor @8%, 1/(1+r)^time Dividend * PV factor
1 12.00% 1.15*(1+12%) $      1.29                          0.9259 $           1.19
2 12.00% 1.29*(1+12%) $      1.44                          0.8573 $           1.24
2 $   50.49                          0.8573 $         43.29
Current share price $         45.72
Current Dividend $            1.44
Rate of return 8.00%
Growth Rate 5.00%
Share Price at the horizon i.e. T2 =Current Dividend*(1+Growth rate)/(Rate of return-Growth Rate)
Share Price at the horizon i.e. T2 =1.44256*(1+0.05)/(0.08-0.05)
Share Price at the horizon i.e. T2 $          50.49
Current share price $          45.72 FROM above table

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