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Correct answer for B is 90.32. Please show ALL work for a great score! Thank you!...

Correct answer for B is 90.32. Please show ALL work for a great score! Thank you!

Firm X just paid an annual dividend of $2.35 per share. This dividend is expected to grow at a rate of 19% per year over the next three years and then slow to a rate of 4% per year from that point forward. The required return on firm X’s shares is 8 percent.

a. Sketch a time line of the dividend stream

b. Estimate the intrinsic value of firm X’s shares today.

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Answer #1

a. Time line

Year 0 Year 1 Year 2 Year 3   Year 4

2.35 2.35*1.19=2.7965 2.7965*1.19=3.327835   3.327835*1.19=3.96012365   3.96012365*1.04=4.118528596

b. The intrinsic value of the firm = present value of future dividends.

The intrinsic value of the firm = $90.32

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