Question

JKL company's earnings per share and dividend growth rates are
first 3 years: 12%/year
after: 9%/year
they pay a dividend if 1.72$ / share recently. the rate of return is required to be at 16%

1) estimate intrinsic value of a share. how much can be attributed to extraordinary growth? how about stable growth?

Answer 1

D0 = 1.72

D1 = 1.72*(1+0.12) = 1.926

D2 = 1.926*(1+0.12) = 2.158

D3 = 2.158*(1+0.12) = 2.416

D4 = 2.416*(1+0.09) = 2.634

According to dividend-discount model,

P0 = D1/(R-G)

P0 = Current stock price

D1 - Dividend at t =1

R - Required rate

G - Growth rate

P3 = D4/(R-g) = 2.634/(0.16-0.09) = 37.628

P0 = 1.926/(1+0.16)^1 + 2.158/(1+0.16)^2 + 2.416/(1+0.16)^3 + 37.628/(1+0.16)^3

P0 = 1.66 + 1.60 + 1.55 + 24.11 = $28.92

Extraordinary growth value = 1.66 + 1.60 + 1.55 = $4.81

Stable growth = $24.11