Question

A stock just paid a $5.00 dividend, expected to grow at 6% for years 1 and 2, and then at 3.5% thereafter. What is the stock's intrinsic value if the investor requires a 9% return? g

Answer 1

Value of the share 98.57 dollars

Step-by-step explanation:

First, we sovle for dividends of year 1 and 2

D1 5 x 1.06 = 5.30

D2 5.30 x 1.06 = 5.618

Then this will grow at 3.5% per year while we require a return of 9%

we use gordon to detemrinate this value:

`(dividends(1+g))/(return-growth) = Intrinsic \: Value`

`(5.618(1+.035))/(0.09 - 0.035) = Intrinsic \: Value`

Last, we determinate the present value of these three cash flow and get the intrincis value:

`(Cashflow)/((1 + rate)^(time) ) = PV`

being rate = 0.09

`\left[\begin{array}{ccc}#&Cashflow&Discounted\\0&5&\\1&5.3&4.86\\2&5.618&4.73\\2&105.7205&88.98\\4&total&98.57\\\end{array}\right]`

Answer 2

The Intrinsic Value or Calculated Price of the under-study stock is $98.57.

Step-by-step explanation:

In the 1st year, the company is expected to Pay a Dividend of $5.3. This is calculated by multiplying the compound factor (1.06) with the current dividend of $5.

In the 2nd year, the growth rate will remain the same. So, multiplying $5.3 with the same compound factor of (1.06) and you will get $5.62.

In the third year, the growth rate will come down to 3.5% and this rate will be constant now. So, multiply the dividend of year 2 with the compound factor of (1.035) and you will get $5.81. Convert this figure to Perpetuity and the formula is;

Cash Flow / Cost of Equity - Growth Rate

This formula for Horizon value will give you $105.72.

Now, you have to find the Present value of all these three calculated Cash flows, add them all and you will get the Intrinsic Value.

Thanks.