Question

Sorenson Corp.'s expected year-end dividend is D1 = $1.60, its required return is rs = 11.00%,...

Sorenson Corp.'s expected year-end dividend is D1 = $1.60, its required return is rs = 11.00%, its growth rate is 5.00%, and its growth rate is expected to be constant in the future. What is Sorenson's expected stock price in 9 years, i.e., what is P9?

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Answer #1

We have to determine Intrinsic Value on Year 9 from now

As per Constnat growth formulae

IV = D1 /(Re -g)

We have to Determine IV9 =D10 /(Re-g)

Re=Required Return.

g = Growth Rate

D10 = 10 th year Dividend

D1 1.600
D2 1.680
D3 1.764
D4 1.852
D5 1.945
D6 2.042
D7 2.144
D8 2.251
D9 2.364
D10 2.482

Growth of 5% is added every time . ie D2 = D1 +5% of D1

IV9 =2.482 /(0.11-0.05)

IV9 =$ 41.367/-

So, the expected stock price as on 9th year is $41.367/-

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