Question

2. The Ramirez Company's last dividend was $1.75. Its dividend growth rate is expected to be at 30% for 2 years, after which dividends are expected to grow at a rate of 7.1% forever. Its required return (r_S) is 14%.

1. What are your estimates of the company’s dividends for years 1 through 3?

2. What is your best estimate for the company’s stock price (Horizon value) in year 2? Show your calculations.

3. What is your best estimate for the intrinsic value of the stock today? Show your work.

Answer 1

A. Dividend in Year 1 =D0*(1+g)=1.75*(1+30%) =2.275 or 2.28
Dividend in Year 2 =D0*(1+g)^2=1.75*(1+30%)^2 =2.9575 or 2.96
Dividend in Year 3 =D0*(1+g)^2*(1+g2)=1.75*(1+30%)^2*(1+7.1%) =3.1675 or 3.17

B. Horizon value =Dividend in Year 3/(Required Rate-Growth) =3.1675/(14%-7.1%) =45.9055 or 45.91

C. Best estimate of the intrinsic value today =Dividend in Year 1/(1+r)+Dividend in Year 2/(1+r)^2+Horizon value/(1+r)^2
=2.275/(1+14%)+2.9575/(1+14%)^2+45.9055/(1+14%)^2 =39.59