Question

The Boulder Brass Works Company (BBWC) is a small-capitalization machine shop that has found a rapidly growing niche market for its custom-machined brass parts. Its business is growing so fast that it has decided not to pay a dividend next year. However, in year 2 it expects its growth to decelerate and so plans to begin paying dividends at that time. At the end of year 2 it plans to pay a dividend of $4.00. At the end of year 3 it plays to pay a dividend of $9.00. Beginning in year 4, BBWC's management believes that the company will have entered its middle age. Management anticipates being able to sustain a dividend growth rate of 4% per year in year 4 and every year thereafter. Firms with similar growth and risk characteristics return 15% per year to their equity investors. What is BBWC's intrinsic value? You must show your work

Answer 1

	Required rate=	15.00%
Year	Previous year dividend	Dividend growth rate	Dividend current year	Horizon value	Total Value	Discount factor	Discounted value
1	0	0.00%	0		0	1.15	0
2	0	0.00%	4		4	1.3225	3.02457
3	4	0.00%	9	85.091	94.091	1.520875	61.86636
	Long term growth rate (given)=	4.00%			Value of Stock =	Sum of discounted value =	64.89

Where
Total value = Dividend + horizon value (only for last year)
Horizon value = Dividend Current year 3 *(1+long term growth rate)/( Required rate-long term growth rate)
Discount factor=(1+ Required rate)^corresponding period
Discounted value=total value/discount factor