Question

Micro Corp. just paid dividends of $2 per share. Assume that over the next three years...

Micro Corp. 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. What is the value of stock two years from now? If it is trading at $55 in the market and you own it do you sell or buy more?

Homework Answers

Answer #1

We will use the dividend discount model to calculate the value of share today. According to this model, present value of future expected dividends is value of share today.

where V3 is the terminal value of share, which is the value of constant growing dividends year after.

D1 = 2 * (1 + 5%) = 2.1

D2 = 2.1 * (1 + 15%) = 2.4150

D3 = 2.415 * (1 + 25%) = 3.0188

D4 = 3.01875 * (1 + 10%) = 3.3206

V3 = 66.4125

V0 = 1.8261 + 1.8261 + 1.9849 + 43.6673 = $49.30 --> Current Value

Market value = $55. Since market value > Current Intrinsic value we just calculated, stock is overvalued and should not be bought.

Value of stock 2 years from now would be:

V2 = 2.625 + 57.75 = $60.38

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
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.
Pipi Storm Corporation has just paid dividends of R2.12 per share. Assume that over the next...
Pipi Storm Corporation has just paid dividends of R2.12 per share. Assume that over the next three years dividends will grow as follows: 25% in year one; 12% in year two; and 10% in year three. After that, growth is expected to level off to a constant growth rate of 7% per year. The required rate of return is 12%. Use the multistage model to calculate the intrinsic value of the share.
A7X Corp. just paid a dividend of $1.50 per share. The dividends are expected to grow...
A7X Corp. just paid a dividend of $1.50 per share. The dividends are expected to grow at 40 percent for the next 10 years and then level off to a growth rate of 6 percent indefinitely.     If the required return is 15 percent, what is the price of the stock today?
A7X Corp. just paid a dividend of $1.55 per share. The dividends are expected to grow...
A7X Corp. just paid a dividend of $1.55 per share. The dividends are expected to grow at 30 percent for the next 7 years and then level off to a growth rate of 8 percent indefinitely.     If the required return is 14 percent, what is the price of the stock today?
Thirsty Cactus Corp. just paid a dividend of $1.20 per share. The dividends are expected to...
Thirsty Cactus Corp. just paid a dividend of $1.20 per share. The dividends are expected to grow at 25 percent for the next 9 years and then level off to a 6 percent growth rate indefinitely. Required : If the required return is 14 percent, what is the price of the stock today?
A7X Corp. just paid a dividend of $1.40 per share. The dividends are expected to grow...
A7X Corp. just paid a dividend of $1.40 per share. The dividends are expected to grow at 30 percent for the next 9 years and then level off to a growth rate of 8 percent indefinitely.     If the required return is 14 percent, what is the price of the stock today? Multiple Choice $82.18 $2.72 $110.05 $107.89 $105.74
A7X Corp. just paid a dividend of $1.32 per share. The dividends are expected to grow...
A7X Corp. just paid a dividend of $1.32 per share. The dividends are expected to grow at 12 percent for the next eight years and then level off to a growth rate of 2.5 percent indefinitely. If the required return is 8 percent, what is the price of the stock today? Select one: A. $28.85 B. $60.91 C. $64.18 D. $45.39 E. $52.87
Upper Gullies Corp. just paid a dividend of $2.70 per share. The dividends are expected to...
Upper Gullies Corp. just paid a dividend of $2.70 per share. The dividends are expected to grow at 19 percent for the next eight years and then level off to a 7 percent growth rate indefinitely. If the required return is 14 percent, what is the price of the stock today? (Do not round intermediate calculations. Round the final answer to 2 decimal places.)   Stock price $
Murray Telecom just paid a $3.50 per share stock dividend (D0). Dividends are expected to grow...
Murray Telecom just paid a $3.50 per share stock dividend (D0). Dividends are expected to grow at a rate of 8 percent per year for the next 6 years, 4 percent per year for the subsequent 4 years, and then level off into perpetuity at a growth rate of 2 percent per year. Using the dividend growth model, what should be the value of the firm’s common stock if the required rate of return on similar securities is 11.25 percent?
Could I Industries just paid a dividend of $1.15 per share. The dividends are expected to...
Could I Industries just paid a dividend of $1.15 per share. The dividends are expected to grow at a rate of 18 percent for the next six years and then level off to a growth rate of 7 percent indefinitely. If the required return is 15 percent, what is the value of the stock today? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT