Homework Answers
Current Dividend = D0 = $ 0.28, Initial Growth Rate = g1 = 5 % for four additional quarters, Perpetual Constant Growth Rate = g2 = 0.3%, Required Return = r = 4 %
Expected Dividends:
D1 = D0 x (1+g1) = 0.28 x 1.05 = $ 0.294, D2 = 0.294 x 1.05 = $ 0.3087, D3 = 0.3087 x 1.05 = $ 0.32414, D4 = 0.32414 x 1.05 = $ 0.34034 , D5 = 0.34034 x 1.003 = $ 0.34136
Horizon Value of Perpetual Dividends (at the end of Quarter 4) = [D5 / (r - g2)] = [0.34136/(0.04 - 0.003)] = $ 9.226
Present Value of Horizon Value = P1 = 9.226 / (1.04)^(4) = $ 7.886
Present Value of Initial Dividends = P2 = [0.294/(1.04)] + [0.3087/(1.04)^(2)] + [0.32414/(1.04)^(3)] + [0.34034/(1.04)^(4)] = $ 1.1472
Therefore, Intrinsic Value per Share = P1 + P2 = 7.886 + 1.1472 = $ 9.0336 ~ $ 9.034
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