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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 13.00% for the next two years and 5.00% thereafter. Yesterday the corporation paid a dividend of $1.01. If the required rate of return is 13.00%, what is the intrinsic value of the stock?

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Expert Solution

D0: $1.01
D1: $ 1.01 *( 1.13) = $1.14
D2: $ 1.14 *( 1.13) = $1.29
Growth rate after 2nd year : 5%
Required rate of return : 13%
Price of Share at the end of 2nd Year (P2): Dividend 2nd year ( 1 + Growth rate) / ( Discount rate - Growth rate)
Price of Share at the end of 2nd Year (P2): $ 1.29 * ( 1 + 0.05) / ( 0.13 - 0.05)
Price of Share at the end of 2nd Year (P2): $ 16.93
Calculation of price as on Today :
Year Cashflow PVF @ 13% Present Value
1 $1.14 0.8850 $1.01
2 $1.29 0.7831 $1.01
2 $16.93 0.7831 $13.26
Intrinsic Value of share, today: $15.28


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