Question

Question 3. Company BMI will experience a supernormal growth rate of 20% in the next two years. The growth rate will then level off to 4% from year 3 and beyond. The most recent dividend payment was $1.00 and the required rate of return for XYZ stock is! 10%. What is the intrinsic value of the BMI stock? Question 3 D1= D2= P2= PV div= PV price- Intrinsic Value

Answer 1

Hi

Here

Current Dividend D0 = $1

2 years growth rate =20%

Hence next year dividend D1 = 1*(1+20%)

=1*1.2 = $1.2

2nd year dividend D2 = 1.2*(1+20%)

= 1.2*1.2 = $1.44

Price at year 2 P2 = D2*(1+g)/(r-g)

Here D2 = $1.44

terminal growth rate g = 4%

required rate of return r = 10%

So P2 = 1.44*(1+4%)/(10%-4%)

= $24.96

Present Value of dividends PV(Div) = D1/(1+r) + D2/(1+r)^2 + D2*(1+g)/(r-g)(1+r)^2

= D1/(1+r) + D2/(1+r)^2 + P2/(1+r)^2

= 1.2/(1+10%) + 1.44/(1+10%)^2 + 24.96/(1+10%)^2

= 1.0909 + 1.190083 + 20.6281

= $22.91

Present Value of price = Present Value of Dividend = $22.91

Intrinsic Value = Present Value of dividend = $22.91

  

Thanks