Question

Gustav Technologies (GT) has just developed a solar panel capable of generating 200% more electricity than any solar panel currently on the market. As a result, GT is expected to experience a 15% annual growth rate for the next 3 years and a 10% growth for 2 years after that. By the end of 5 years, other firms will have developed comparable technology, and GT's will remain constant indefinitely. Stockholders require a return of 15% on GT's stock. The most recent annual dividend, which was paid yesterday, was $1.50 per share. Calculate the estimated intrinsic value of the stock today.

Answer 1

D1 = 1.50*(1+15%) = 1.725

D2 = 1.725*(1+15%) = 1.98

D3 = 1.98*(1+15%) = 2.28

D4 = 2.28*(1+10%) = 2.51

D5 = 2.51*(1+10%) = 2.76

continuous value = D5 / K

where K = required return

continuous value = 2.76 / 15% = 18.40

(it is assumed that dividend is constant and no growth in dividend after year 5)

so total value in year 5 = 18.40 + 2.76 = 21.16

intrinsic value = present value of above cash flows.

intrinsic value = 1.725 / (1.15) + 1.98 /(1.15^2) + 2.28 / (1.15^3) + 2.51 / (1.15^4) + 2.76 / (1.15^5)

= $16.46

(above solution is based on no growth in dividend after year 5. if growth rate is present after year 5 then answer would be different)