Equity

rahulsisodia · February 15, 2018, 1:08pm

HELP!!

An analyst is attempting to value shares of the XYZ Company. The company has just paid a dividend of $0.58 per share. Dividends are expected to grow by 15% next year and 10% year after that. From the third year onward, dividends are expected to grow at 5.6% per year for the foreseeable future. If the required rate of return is 8.3%, what would be the intrinsic value of the stock is closest to ?

Please do give some explanation of your answer as I’m trying to understand this concept.

cpk123 · February 15, 2018, 1:56pm

D0=0.58

D1=0.58 * 1.15 = 0.667

D2=0.667 * 1.10 = 0.7337

after that grows indefinitely at 5.6%

So P1 = D2 * (1+g_indefinite) / (0.083-0.056) = 0.7337 * 1.056 / (0.083-0.056) = 28.70

0…1…2

d1=0.667,p1=28.70

so p0 = (28.70+0.667)/1.083 = 27.12