Question

Firm Z just paid a dividend of $6.00 this year, and its dividend is expected to grow at 30% for the next year. After you receive all the next year's dividend, you expect to sell the stock at $100 immediately. Assume that the discount rate is 20% and dividends are paid quarterly. What is the intrinsic value of the stock?

a) 89.18

b) 85.07

c) 88.65

d) 91.52

Answer 1

Yearly dividend paid = $6

Quarterly dividend paid = $6/4 = $1.5

Discount rate per quarter = 20%/4 = 5%

So dividend for first quarter = $1.5*(1+0.075)=$1.6125

dividend for second quarter = $1.5*(1+0.075)^2=$1.7334

dividend for third quarter = $1.5*(1+0.075)^3=$1.8634

dividend for first quarter = $1.5*(1+0.075)=$2.0032

sale price of stock at end of quarter 4 = $100

Quarter	Dividend	PVF @ 5%	P.V.
1	1.6125	0.952381	1.54
2	1.7334	0.907029	1.57
3	1.8634	0.863838	1.61
4	102.0032	0.822702	83.92
			88.64

So correct answer is option (c)