The Jumbo Jamboree Corp. plans to close its business over the next five years. They plan,...

The Jumbo Jamboree Corp. plans to close its business over the next five years. They plan, however, to maintain their annual dividends to their loyal shareholders. They plan to play the coming year’s dividend of $2.50, and reduce the dividend to $2.00 for the second year, $1.50 for the third year, $1.00 for the fourth year, and $.50 for the fifth year. The expected market selling price of the stock at the end of the fifth year is expected to be $1.00 per share. If investors require a 12% return on their investment, what is the intrinsic value of the stock ?

Expert Solution

Year	Cash flow	× discount rate	Present value
0	$ -	1.0000	$ -
1	$ 2.50	0.8929	$ 2.23
2	$ 2.00	0.7972	$ 1.59
3	$ 1.50	0.7118	$ 1.07
4	$ 1.00	0.6355	$ 0.64
5	$ 0.50	0.5674	$ 0.28
5	$ 1.00	0.5674	$ 0.57

			$ -
Stock price			$ 6.38

Stock price is6.38

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jeff jeffy answered 1 year ago

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