Question

ABC Corp. has just paid a quarterly dividend of $0.3. ABC's dividends will grow by 5% for the next 4 quarters, and then grow by 0.5% thereafter. ABC has a quarterly required return of 4%.

What is the intrinsic value of ABC stock?

Answer 1

Recent Quarter Dividend, D0 = $0.30

Growth rate for next 4 quarters is 5%, followed by a constant quarterly growth (g) is 0.50%

D1 = $0.3000 * 1.05
D1 = $0.3150

D2 = $0.3150 * 1.05
D2 = $0.3308

D3 = $0.3308 * 1.05
D3 = $0.3473

D4 = $0.3473 * 1.05
D4 = $0.3647

D5 = $0.3647 * 1.005
D5 = $0.3665

Quarterly required return, r = 4%

P4 = D5 / (r - g)
P4 = $0.3665 / (0.04 - 0.005)
P4 = $10.4714

P0 = $0.315/1.04 + $0.3308/1.04^2 + $0.3473/1.04^3 + $0.3647/1.04^4 + $10.4714/1.04^4
P0 = $10.18

So, intrinsic value of stock is $10.18