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Due to an extensive investment in research and development, Banana Inc., recently developed a new wireless...

Due to an extensive investment in research and development, Banana Inc., recently developed a new wireless communication system that should greatly increase the stock's dividend. One analyst believes the current annual dividend of $1 will increase by 20% for each of the next 3 years and then 6% for the foreseeable future. What is the intrinsic value per share of the company's stock assuming an investor's required rate of return of 8%?

A. $76.35

B. $91.50

C. $95.91

D. $78.49

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Answer #1

Intrinsic Value per share is equal to the present value all future dividends

= 1(1.20)/(1.08) + 1(1.20)2/(1.08)2 + 1(1.20)3/(1.08)3 + 1(1.20)3(1.06)/(8%-6%)(1.08)3

= $76.35 (approx.)

Hence, the answer is A.$76.35

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