Question

1. Flowers Specialists pays a current (annual) dividend of $1 and is expected to grow at 30% for the first three years, 15 percent for the following two years, and then at 8% thereafter. If the required return for Flowers Specialists is 10.5%, what is the intrinsic value of Flowers Specialists stock?

Answer 1

The intrinsic value is computed as shown below:

= Dividend in year 1 / (1 + required rate of return)¹ + Dividend in year 2 / (1 + required rate of return)² + Dividend in year 3 / (1 + required rate of return)³ + Dividend in year 4 / (1 + required rate of return)⁴ + Dividend in year 5 / (1 + required rate of return)⁵ + 1 / (1 + required rate of return)⁵ [ ( Dividend in year 5 (1 + growth rate) / ( required rate of return - growth rate) ]

= ($ 1 x 1.30) / 1.105¹ + ($ 1 x 1.30²) / 1.105² + ($ 1 x 1.30³) / 1.105³ + ($ 1 x 1.30³ x 1.15) / 1.105⁴ + ($ 1 x 1.30³ x 1.15²) / 1.105⁵ + 1 / 1.105⁵ [ ( $ 1 x 1.30³ x 1.15² x 1.08) / ( 0.105 - 0.08) ]

= $ 1.30 / 1.105 + $ 1.69 / 1.105² + $ 2.197 / 1.105³ + $ 2.52655 / 1.105⁴ + $ 2.9055325 / 1.105⁵ + $ 125.519004 / 1.105⁵

= $ 83.84 Approximately

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