Question

ABC Corp. has just paid a dividend of $0.57. ABC has an annual required return of 12.55%.

1a: If dividends are annual and expected to be constant, what is the intrinsic value of ABC stock?

1b: What is ABC's dividend yield?

1c: From now on, assume that the dividend of $0.57 was a quarterly dividend. What is the quarterly discount rate?

1d: What is the intrinsic value if dividends are constant and quarterly?

1e: We now think that dividends will grow by 0.6% from quarter to quarter. The firm just paid the quarterly dividend of 0.57. What is the intrinsic value of ABC stock?

1f: A different analyst thinks that ABC's dividends will grow by 5% for the next 4 quarters, and then grow by 0.6% thereafter. What is the intrinsic value?

Answer 1

1a) As your dividends will not grow at a certain rate but rather will stay the same, you could apply the Gordon Growth model in the following manner:

P = D / r

where

P = price

D = dividend

r = rate of return

So, P = 0.57 / .1255

P = $4.54 which is the intrinsic value of the stock