Question

Suppose that NVIDIA Corporation (NVDA) stock is selling for $150.00. Analysts believe that the growth rate for NVDA will be 20% next year, 30% for the following 4 years, 10% for the following two years, and thereafter the growth rate will be 6% indefinitely. NVDA will pay a cash dividend of $.65 per share next year. Thereafter the dividend will grow by the same rate as the company. Stockholders require a return of 16 percent on NVIDIA’s stock.

Required:

1. Based on the above assumptions, determine the price of NVIDIA’s common stock.
2. Explain whether an investor should buy the stock.

Answer 1

A	B	C	D	E	F	G	H	I	J	K	L	M	N	O	P	Q
2
3		a)
4		Price of the stock will be the present value of the future dividends.
5		Dividend next year	$0.65
6		Required rate of return	16%
7
8		Year	0	1	2	3	4	5	6	7	8	9	…
9		Dividend growth rate		20%	30%	30%	30%	30%	10%	10%	6%	6%	6%
10		Dividend		$0.65	$0.85	$1.10	$1.43	$1.86	$2.04	$2.25	$2.38	$2.52		=J10*(1+K9)
11		Terminal value = DIV8/(rs-gL)								$23.81				=L10/(D6-L9)
12		Present value of dividends		$0.56	$0.63	$0.70	$0.79	$0.88	$0.84	$9.22				=(K10+K11)/((1+$D$6)^K8)
13		Price of share at Year 0	$13.62	=SUM(E12:K12)
14
15		Thus the price of stock is	$13.62
16
17		b)
18
19		Market price of the stock is $150 whereas intrinsic value of stock is $13.60,
20		therefore the share is overpriced.
21		Hence the share should not be bought.
22