Question

Question 1/ Firm A has just paid a dividend of $1.5 per share. The dividends are expected to grow during year 1 by 14.5% and during year 2 by 11.9% and during year 3 by 8.5% and during year 4 by 6.5%. Starting from year 4 the dividends are expected to grow constantly by 4.5% forever. The required rate of return on the stocks is 12%. a/ Compute the intrinsic value of the stock now? (Show your steps) b/ Compute the intrinsic value of the stock by the end of year 3? (Show your steps) c/ Compute the intrinsic value of the stock by the end of year 10? (Show your steps)

Answer 1

Dividend Year 0 =1.5
D1 =1.5*(1+14.5%)=1.7175
D2=1.5*(1+14.5%)*(1+11.9%)=1.921883
D3=1.5*(1+14.5%)*(1+11.9%)*(1+8.5%)=2.085243
D4=1.5*(1+14.5%)*(1+11.9%)*(1+8.5%)*(1+6.5%)=2.220783
D5 =1.5*(1+14.5%)*(1+11.9%)*(1+8.5%)*(1+6.5%)*(1+4.5%)=2.320719

Terminal Value =D5/(Required Rate-Growth) =2.320719/(12%-4.5%) =30.942914

Intrinsic Value of the stock now=D1/(1+r)+D2/(1+r)^2+D3/(1+r)^3+D4/(1+r)^4+Terminal Value/(1+r)^4
=1.7175/(1+12%)+1.921883/(1+12%)^2+2.085243/(1+12%)^3+2.220783/(1+12%)^4+30.942914/(1+12%)^4=25.63

Intrinsic Value of Stock after 3 years =D4/(1+r)+Terminal Value/(1+r) =2.220783/(1+12%)+30.942914/(1+12%) =29.61

Intrinsic Value of Stock after 10 years =Intrinsic Value*(1+g)^6 =30.942914*(1+4.5%)^6 =40.30