Question

annual dividend of $1 and is expected to grow at 20% for two years and then at 4% thereafter. what is the intrinsic value of Garza Inc. stock? (consider the required rate of return equals 8.5%).

Answer 1

Value of stock is $ 30.60

Step-1:Calculation of present value of dividend of next 2 years
Year	Dividend	Discount factor	Present Value
a	b	c=1.085^-a	d=b*c
1	$       1.20	0.921659	$       1.11
2	$       1.44	0.849455	$       1.22
Total			$       2.33
Step-2:Calculation of present value of dividend after year 2
Present value	=	D2*(1+g)/(Ke-g)*DF2			Where,
	=	$    28.27			D2	=	$       1.44
					g	=	4%
					Ke	=	8.50%
					DF2	=	0.849455
Step-3:Calculation of sum of present value of future dividends
Sum of present value of dividends	=	$       2.33	+	$    28.27
	=	$    30.60