The CEO of ICG Inc. announced that the company will pay an annual dividend of $1.00...
The CEO of ICG Inc. announced that the company will pay an annual dividend of $1.00 per year, one year from today.
It is estimated that during the following six years, the dividend will grow at an annual rate of 7%
After that, the growth rate will be equal to 4% per year and continue at that rate indefinitely. Calculate the intrinsic value of the ICG's stock if the required rate of return is 6.7%.
Homework Answers
| Required rate= | 6.70% | ||||||
| Year | Previous year dividend | Dividend growth rate | Dividend current year | Horizon value | Total Value | Discount factor | Discounted value |
| 1 | 0 | 0.00% | 1 | 1 | 1.067 | 0.9372 | |
| 2 | 1 | 7.00% | 1.07 | 1.07 | 1.138489 | 0.93984 | |
| 3 | 1.07 | 7.00% | 1.1449 | 1.1449 | 1.214767763 | 0.94248 | |
| 4 | 1.1449 | 7.00% | 1.225043 | 1.225043 | 1.296157203 | 0.94513 | |
| 5 | 1.225043 | 7.00% | 1.31079601 | 1.31079601 | 1.382999736 | 0.94779 | |
| 6 | 1.31079601 | 7.00% | 1.402551731 | 1.402551731 | 1.475660718 | 0.95 | |
| 7 | 1.402551731 | 7.00% | 1.500730352 | 57.806 | 59.30673035 | 1.574529986 | 37.66631 |
| Long term growth rate (given)= | 4.00% | Value of Stock = | Sum of discounted value = | 43.33 |
| Where | |||
| Current dividend =Previous year dividend*(1+growth rate)^corresponding year | |||
| Unless dividend for the year provided | |||
| Total value = Dividend + horizon value (only for last year) | |||
| Horizon value = Dividend Current year 7 *(1+long term growth rate)/( Required rate-long term growth rate) | |||
| Discount factor=(1+ Required rate)^corresponding period | |||
| Discounted value=total value/discount factor | |||
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