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A company’s common stock is expected to pay $2 in dividends annually over the next four...

A company’s common stock is expected to pay $2 in dividends annually over the next four years. At the end of the fourth year, its stock is expected to be valued at $45. (5 pts) If the firm’s cost of equity is 12%, what is its intrinsic value today? (5 pts) What should its stock sell for in 1 year?

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Answer #1

The value of stock at the end 4th year is nothing but its terminal value.

Intrinsic value of stock = PV of dividends during constant dividend period + Terminal Value

Intrinsic value today = $34.67

The stock would sell for $36.83 in 1 year.

Note: For calculating the value of tock in 1 year simply shift the discount factor by 1 year. Year 1 becomes your t=0 and Year 2 becomes your t=1 and so on.

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