Question

1. Here you go - the non-constant DDM: Jonestown, Inc.’s current dividend of $2.50 is expected to grow 20% for the next 5 years and then fall to 10% thereafter. If the investor’s required rate of return is 14%, what is Jonestown’s intrinsic value (what would you pay for the stock today)?

   	a.	$92.15
   	b.	$185.62
   	c.	$103.46
   	d.	$48.86

Answer 1

Year	Calculations	Dividend
0		$                  2.5000
1	=2.5*1.2	$                  3.0000
2	=3*1.2	$                  3.6000
3	=3.6*1.2	$                  4.3200
4	=4.32*1.2	$                  5.1840
5	=5.184*1.2	$                  6.2208
6	=6.2208*1.1	$                  6.8429
Terminal Value at the end of year 5 = Year 6 Dividend / (required rate- growth rate)
=6.8429/(0.14-0.1)
=171.0725
Calculation of stock price
Year	Cash Flow	PV Factor	PV Of Cash Flow
a	b	c=1/1.14^a	d=b*c
1	$                   3.0000	0.87719	$                     2.63
2	$                   3.6000	0.76947	$                     2.77
3	$                   4.3200	0.67497	$                     2.92
4	$                   5.1840	0.59208	$                     3.07
5	$                   6.2208	0.51937	$                     3.23
5	171.0725	0.51937	$                  88.85
Stock Price			$                103.46
Correct Option =	C .$103.46

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