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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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