Question

Communications Fiji Limited just paid dividends of \$2 per share. Assume that over the next three...

Communications Fiji Limited just paid dividends of \$2 per share. Assume that over the next three years dividends will grow as follows, 5% next year, 15% in year two, and 25% in year 3. After that growth is expected to level off to a constant growth rate of 10% per year. The required rate of return is 15%. Calculate the intrinsic value using the multistage model.

 D0 2 For the first three years g1 0.05 D1 2*(1+.05) D1 2.1 g2 0.15 D2 2.1*(1+.15) D2 2.415 g3 0.25 D3 2.415*(1+.25) D3 2.677 Find the price of the stock in year 3 g4 0.1 D4 2.677*(1+.1) D4 2.9447 According to the dividend growth model. P3 = D4/(R-g4) R is the required return that is 15%. P3 2.9447/(.15 - .1) P3 58.894 Cash flow in year 3 P3 +D3 Cash flow in year 3 61.571 The price of the stock today = sum of present value of future cash flows. Using R = .15 Year 1 2 3 Cash flow 2.1 2.415 61.57088 Present value 1.83 1.83 40.48 sum of present values 44.14 The intrinsic value of the stock is \$44.14.

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