Question

For the most recent year, GHI Company paid an annual dividend of $1.00. The company expects dividends to grow by 15% for the next two years, followed by 4 years of growth at 10% per year, before dropping to a perpetual growth rate of 4% starting in year 7. The required return is 12%.

What is the intrinsic value per share of GHI stock?

Answer 1

Intrinsic value of stock is $ 18.87

Working:

As per dividend discount model, value of stock is the present value of dividend.
Step-1:Present value of dividend of next 6 years
Year	Dividend	Discount factor	Present value
a	b	c=1.12^-a	d=b*c
1	$       1.15	0.892857	$       1.03
2	$       1.32	0.797194	$       1.05
3	$       1.45	0.71178	$       1.04
4	$       1.60	0.635518	$       1.02
5	$       1.76	0.567427	$       1.00
6	$       1.94	0.506631	$       0.98
Total			$       6.11
Working:
Dividend of year :
1	$       1.00	x	1.15	=	$       1.15
2	$       1.15	x	1.15	=	$       1.32
3	$       1.32	x	1.10	=	$       1.45
4	$       1.45	x	1.10	=	$       1.60
5	$       1.60	x	1.10	=	$       1.76
6	$       1.76	x	1.10	=	$       1.94
Step-2:Present value of dividend after year 6
Present value	=	D6*(1+g)/(Ke-g)*DF6			Where,
	=	$    12.75			D6	$       1.94
					g	4%
					Ke	12%
					DF6	0.506631
Step-3:Value of stock
Value of stock	=	Present value of dividends
	=	$       6.11	+	$    12.75
	=	$    18.87