Question

1. Windsor Corporation paid a cash dividend of $2.15 per share eight years ago to the firm's common stock holders. Recently, the firm paid a dividend of $4.13. Dividends are expected to grow in the future at the same annual rate as during the past eight years. The required rate of return on Windsor common stock is 12 percent.
   1. What should be the intrinsic value of a share of Windsor common stock?

2. If the current market price of Windsor is $120, what is your expected rate of return?

Answer 1

a)

Growth rate = (Future value / present value)^1/n - 1

Growth rate = (4.13 / 2.15)^1/8 - 1

Growth rate = 1.085023 - 1

Growth rate = 0.085023 or 8.5023%

Intrinsic value =D1 / required rate - growth rate

Intrinsic value = (2.15 * 1.085023) / 0.12 - 0.085023

Intrinsic value = 2.332799 / 0.034977

Intrinsic value = $66.70

b)

Expected rate of return = (D1 / price) +growth rate

Expected rate of return = [(2.15 * 1.085023) / 120] + 0.085023

Expected rate of return = [2.332799 / 120] + 0.085023

Expected rate of return = 0.1045 or 10.45%