Non-Constant Growth Valuation: Divining Rod Water Resources Corp (DRWR) has experienced rapid growth that is expected...
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Non-Constant Growth Valuation: Divining Rod Water Resources Corp (DRWR) has experienced rapid growth that is expected to continue for the next several years. Specifically, high growth of 30% for the next three years, followed by constant growth of 6% thereafter is expected. The most recent dividend was $2.50 and the required rate of return is 14%. What is the intrinsic value of DRWR’s stock?
Homework Answers
D1=(2.5*1.3)=3.25
D2=(3.25*1.3)=4.225
D3=(4.225*1.3)=5.4925
Value after year 3=(D3*Growth rate)/(Required return-Growth rate)
=(5.4925*1.06)/(0.14-0.06)
=72.775625
Hence intrinsic value=Future dividend and value*Present value of discounting factor(rate%,time period)
=3.25/1.14+4.225/1.14^2+5.4925/1.14^3+72.775625/1.14^3
=$58.93(Approx).
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