Question

investment Company forecasts a $1.55 dividend for 2019, $1.7 dividend for 2020 and a $1.8 dividend for 2021 for Malibu Corporation. For year 2022 Investment Company forecasts that Malibu will pay a $2.0 dividend and that dividend will continue to grow by 3% each year.

Using the dividend discount valuation model determine the intrinsic value of Malibu Corporation, assuming the company's cost of equity capital is 7%.

Answer 1

The value is computed as shown below:

= Dividend in 2019 / (1 + cost of capital) + Dividend in 2020 / (1 + cost of capital)² + Dividend in 2021 / (1 + cost of capital)³ + Dividend in 2022 / (1 + cost of capital)⁴ + 1 / (1 + cost of capital)⁴ x [ (Dividend in 2022 x (1 + growth rate) / (cost of capital - growth rate) ]

= $ 1.55 / 1.07 + $ 1.7 / 1.07² + $ 1.8 / 1.07³ + $ 2 / 1.07⁴ + 1 / 1.07⁴ x [ ($ 2 x 1.03) / (0.07 - 0.03) ]

= $ 1.55 / 1.07 + $ 1.7 / 1.07² + $ 1.8 / 1.07³ + $ 2 / 1.07⁴ + 1 / 1.07⁴ x $ 51.5

= $ 1.55 / 1.07 + $ 1.7 / 1.07² + $ 1.8 / 1.07³ + $ 53.5 / 1.07⁴

= $ 45.22 Approximately

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