Question

please someone help me solve the two questions !!!

9. The current dividend of MultiGrowth Inc. is $1.5. The company is expected to grow rapidly for the next 3 years at 30%, at the end of which time the new growth rate is expected to be a constant 8% a year. The required rate of return is 15%. What is the intrinsic value of the firm? A. $39.21 B. $39.50 C. $38.68 D. $39.59 10. Consider the following short sale example: an investor borrows 100 shares of a stock from the broker, put down 50% as the initial margin, and sells the stock at $100/share in the market. Suppose the stock price later goes up from $100/share to $150/share, put a _may limit the potential loss for the investor. A. limit sell order at $120/share B. limit buy order at $120/share C. stop buy order at $120/share D. stop loss order at $120/share

Answer 1

Solution to the QUESTION-9

Step-1, The Dividend per share for the next 3 Years

Dividend in Year 0 (D0) = $1.50 per share

Dividend in Year 1 (D1) = $1.9500 per share [D0 x 130%]

Dividend in Year 2 (D2) = $2.5350 per share [D1 x 130%]

Dividend in Year 3 (D3) = $3.2955 per share [D2 x 130%]

Step-2, The Stock price at the end of 3 Year

Here, we have Dividend per share in Year 3 (D3) = $3.2955 per share

Dividend Growth Rate (g) = 8.00% per year

Required Rate of Return (Ke) = 15.00%

Therefore, the Stock price at the end of 3 Year = D3(1 + g) / (Ke – g)

= $3.2955(1 + 0.08) / (0.15 – 0.08)

= $3.5591 / 0.07

= $50.84 per share

Step-3, The Current Value of the stock

As per Dividend Discount Model, the Fair Market Value of the stock now is the aggregate of the Present Value of the future dividend payments and the present value the stock price for the Year 3

Year	Cash flow ($)	Present Value Factor (PVF) at 15.00%	Present Value of cash flows ($) [Cash flows x PVF]
1	1.9500	0.86957	1.70
2	2.5350	0.75614	1.92
3	3.2955	0.65752	2.17
3	50.84	0.65752	33.43
\TOTAL	39.21

“Hence, the Intrinsic Value of the firm will be (A). $39.21”

NOTE

The Formula for calculating the Present Value Factor is [1/(1 + r)n], Where “r” is the Discount/Interest Rate and “n” is the number of years.