Question

Caskey Inc. is experiencing a period of growth. Dividends are expected to grow at a rate of 14.00% for the next two years and 5.00% thereafter. Yesterday the corporation paid a dividend of $1.10. If the required rate of return is 8.00%, what is the intrinsic value of the stock?

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

с Last Dividend Non-constant growth for first 2 years Constant growth rate thereafter Required return $1.10 14.00% 5.00% 8.00% Year Dividend $1.25 1 $1.43 $1.50 Terminal value at end of 2nd year $50.03 Intrinsic value of stock $45.28 14 15 16

Cell reference -

Last Dividend Non-constant growth for first 2 years Constant growth rate thereafter Required return 1.1 0.14 10.05 0.08 -NMONOEM Dividend Year =C2*(1+C3) =C8*(1+C3) =C9*(1+C4) Terminal value at end of 2nd year =C10/(C5-C4) Intrinsic value of stock =NPV(C5, C8:09)+C12/(1+C5^2 14 15 16 17

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