Question

A firm is expected to make four dividend payments of 1.40. Then dividends are expected to stop for 7 periods. At that point, the stock has a forecasted EPsS of $7.60 and a PE ratio of 23.2. If the required return of the stock is 15%, what is its intrinsic value?

According to my professor, the answer should be $37.03. However, I do not see how he got that answer.

Answer 1

Cash flows will be
Year Cash flow
1 1.40
2 1.40
3 1.40
4 1.40
5 0
6 0
7 0
8 0
9 0
10 0
11 0
12 =7.60*23.2=176.32

USING FINANCIAL CALCULATOR
Approach 1:
press CF 2nd CE/C
press CF
0
Enter
down arrow,
1.40
Enter
down arrow (twice),
1.40
Enter
down arrow (twice),
1.40
Enter
down arrow (twice),
1.40
Enter
down arrow (twice),
0
Enter
down arrow (twice).
0
Enter
down arrow (twice).
0
Enter
down arrow (twice).
0
Enter
down arrow (twice).
0
Enter
down arrow (twice).
0
Enter
down arrow (twice).
0
Enter
down arrow (twice).
176.32
Enter
down arrow (twice)

press NPV
Type 15
Enter
press down arrow
press CPT
=37.03

Approach 2:
Step 1:
N=4
PMT=-1.40
I/Y=15%
FV=0
CPT PV=4

Step 2:
N=12
I/Y=15%
PMT=0
FV=-176.32
CPT PV=33.03

Step 3:
Price=4+33.03=37.03

USING FORMULA

=1.40/1.15^1+1.40/1.15^2+1.40/1.15^3+1.40/1.15^4+7.60*23.2/1.15^12

=37.03