Question

DE S$ 925, should it be purchased? Explain. duct to gain for the next three years. Afterwards, its free cash w/dual growth rates) Tech, Inc, a regional technology manufacturer pans to rll uota neow DDM n market share. This expansion is expected to capture a significant share of the market ar flows are expected to taper. Tech, Inc. has just a cash dividend of $2.00 and is expected to increase its payout by 25% for the next three years. par wards, its dividends are expected to grow at 2% indefinitely. Tech has a required return of After 15%.

Answer 1

	Answer = A)
				Last Dividend	Growth Rate	Dividend of the year
	D0=					2
	Dividend after the Year 1= D1			$             2.00	25%	$                   2.50
	Dividend after the Year 2 = D2			$             2.50	25%	$                   3.13
	Dividend after the Year 3 = D3			$             3.13	25%	$                   3.91
	Dividend after the Year 4 = D4			$             3.91	2.0%	$                   3.98
	Answer = B)
	CALCULATION OF THE INSTRINSIC VALUE OF THE SHARE
	Formula	P3 = D4 / Ke - g
	Ke = Cost of Equity = Expected return = 15%          or =				0.1500
	g = Growth rate = 2.0% =                                                      or =				0.02
	P3 = price of the stock at the end of 3rd year
	P3        =	D4	( "/" By	Ke	(-)	Growth	)
	P3        =	$               3.98	("/" By	0.1500	(-)	0.02	)
	P3        =	$               3.98	"/" By	0.1300
	P3        =	$             30.65
	CALCLATION OF PRESENT VALUE OF THE STOCK
		Year	Dividend	PVF @ 15%	Present Value
		1	$             2.50	0.86957	$       2.17
		2	$             3.13	0.75614	$       2.36
		3	$             3.91	0.65752	$       2.57
	Stock Value P3	3	$           30.65	0.65752	$     20.15
			Total		$     27.26
	Answer = Intrinsic Value of the Stock =			$           27.26
	Answer =C)
	If the market price of the share is $ 30 than I will not advise to purhcase the share
	because the intinsic value of the shares is only $ 27.26