You are forecasting a stock to pay the following dividends: $4.45 , $5.80 , $4. The...
You are forecasting a stock to pay the following
dividends:
$4.45 , $5.80 , $4.
The dividends will then begin declining at a rate of 8.5% for the foreseeable future. What is the intrinsic value of this stock if the required return is 14%?
I keep getting 18.42 but the answer shows 22.05 please advise.
Homework Answers
Value after year 3=(D3*Growth rate)/(Required rate-Growth rate)
=(4*(1-0.085)/(0.14-(0.085)
=3.66/0.225
=16.267
Hence intrinsic value=Future dividend and value*Present value of discounting factor(rate%,time period)
=4.45/1.14+5.8/1.14^2+4/1.14^3+16.267/1.14^3
=$22.05(Approx).
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