Fowler and Woods Enterprises is a publicly traded company that just paid a $2.00 per share dividend. The company is expected to increase its dividend by 20% per year for the next two years. After the second year, the dividend growth rate will be 5% per year for the next two years. After the 4th year, dividends are expected to grow at a constant rate of 3% into the foreseeable future. An analyst estimates that investors in the firm will require a 12% annual return. Based on this information, what is the intrinsic value of the stock today?
Intrinsic value of the stock today is the PV of the expected dividends | ||||
when discounted at the required rate of return of 12%. | ||||
Year | Dividend | PVIF at 12% | PV at 12% | |
0 | $ 2.00 | |||
1 | $ 2.40 | 0.89286 | $ 2.14 | |
2 | $ 2.88 | 0.79719 | $ 2.30 | |
3 | $ 3.02 | 0.71178 | $ 2.15 | |
4 | $ 3.18 | 0.63552 | $ 2.02 | |
Sum of PV of dividends of years 1 to 4 | $ 8.61 | |||
Continuing value of dividends at t4 = 3.18*1.03/(0.12-0.03) = | $ 36.39 | |||
PV of continuing value = 36.39*0.63552 = | $ 23.13 | |||
Intrinsic value of the stock today = 8.61+23.13 = | $ 31.74 |
Fowler and Woods Enterprises is a publicly traded company that just paid a $2.00 per share...
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