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Question of the Week – Equity

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    • Avatar of AdaptPrepAdaptPrep
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        • Undecided
        05 May 2018 at 8:12 pm
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        You are provided the following information about a stock:
        • Current price: $36.78
        • Current annual dividend: $1.70
        • Expected dividend growth rate: 4.5% for the next 2 years, 1.6% thereafter

        If the required rate of return on this stock is 8.5%, the intrinsic stock value according to the two-stage dividend discount model is closest to:

        • $25
        • $26
        • $27
      • Avatar of AdaptPrepAdaptPrep
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          • Undecided
          09 May 2018 at 7:23 am
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          The dividends each year are:

          D1 = 1.70 * 1.045 = 1.7765

          D2 = 1.70 * 1.045^2 = 1.8564

          D3 = 1.70 * 1.045^2 * 1.016 = 1.8861

           

          The terminal value at t = 2 is:

          V2 = 1.8861 / (0.085 – 0.016) = 27.3354

           

          The intrinsic value of the stock at t = 0 is:

          V0 = 1.7765 / 1.085 + 1.8564 / 1.085^2 + 27.3354 / 1.085^2 =
          26.43

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