Question

An investor gathers the following information about a company: 9. Current dividend share $3 per Historical annual dividend growth rate 4% Expected annual dividend growth rate for the next three years 8% $33 Expected stock value per share at the end of Year 3 If the investor's required rate of return is 15%, the current estimate of the intrinsic value per share is: $

Answer 1

Using DDM model,

Stock Price = PV(Dividends) + PV(Horizon Value)

Stock Price = 3(1.08/1.15) + 3(1.08/1.15)² + 3(1.08/1.15)³ + 33/(1.15)³

Stock Price = 2.817 + 2.646 + 2.485 + 21.698

Stock Price = $29.65