A stock priced at £35.73 is projected to pay dividends of £1.50, £2.00, and £2.50 at the end of the next three years. At the time of the third dividend, the stock is expected to be worth £36.23. If the required rate of return for this stock is 10%, the intrinsic value of the stock is closest to:
The intrinsic value of the stock is
equal to the present value of its cash flows.
Year 1 CF: £1.50 dividend
Year 2 CF: £2.00 dividend
Year 3 CF: £2.50 dividend + £36.23
terminal value (£38.73 total)
The present value of these payments
at 10% is:
PV = 1.50 / 1.1 + 2.00 / 1.1^2 +
38.73 / 1.1^3 = 32.11
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