Answer:
The Intrinsic Value or Calculated Price of the under-study stock is $98.57.
Explanation:
In the 1st year, the company is expected to Pay a Dividend of $5.3. This is calculated by multiplying the compound factor (1.06) with the current dividend of $5.
In the 2nd year, the growth rate will remain the same. So, multiplying $5.3 with the same compound factor of (1.06) and you will get $5.62.
In the third year, the growth rate will come down to 3.5% and this rate will be constant now. So, multiply the dividend of year 2 with the compound factor of (1.035) and you will get $5.81. Convert this figure to Perpetuity and the formula is;
Cash Flow / Cost of Equity - Growth Rate
This formula for Horizon value will give you $105.72.
Now, you have to find the Present value of all these three calculated Cash flows, add them all and you will get the Intrinsic Value.
Thanks.
Answer:
Value of the share 98.57 dollars
Explanation:
First, we sovle for dividends of year 1 and 2
D1 5 x 1.06 = 5.30
D2 5.30 x 1.06 = 5.618
Then this will grow at 3.5% per year while we require a return of 9%
we use gordon to detemrinate this value:
[tex]\frac{dividends(1+g)}{return-growth} = Intrinsic \: Value[/tex]
[tex]\frac{5.618(1+.035)}{0.09 - 0.035} = Intrinsic \: Value[/tex]
Last, we determinate the present value of these three cash flow and get the intrincis value:
[tex]\frac{Cashflow}{(1 + rate)^{time} } = PV[/tex]
being rate = 0.09
[tex]\left[\begin{array}{ccc}#&Cashflow&Discounted\\0&5&\\1&5.3&4.86\\2&5.618&4.73\\2&105.7205&88.98\\4&total&98.57\\\end{array}\right][/tex]
