Question

HAND CALCULATIONS ONLY. NO EXCEL

Pepsico’s most recent dividend was $1. The dividend next year is expected to increase 10%. The dividend is expected to continue growing at 10% for two addition years after that. After these three years of strong growth, the stock is then expected to grow at a constant 4% thereafter. Calculate the intrinsic value using the multi-stage dividend discount model. Pepsico’s required rate of return is 8%.

Answer 1

D0 = 1
D 1 = 1.00 + 10% = 1.1
D 2 = 1.1 +10% = 1.21
d 3 = 1.21 + 10% = 1.33
D 4 = 1.33 + 4% = 1.38
Horizon value at year-3 = D 4 / (Required rate-Growth rate)
		1.38 / (8-4)% = 34.50
Intrinsic value
Year	Cashflows	PVF at 8%	Present value
1	1.1	0.9259259	1.018519
2	1.21	0.8573388	1.03738
3	1.33	0.7938322	1.055797
3	34.5	0.7350299	25.35853
Intrinsic value			28.47