Question

A firm is planning on paying its first dividend of $2 three years from today. After that, dividends are expected to grow at 6% per year indefinitely. The stock's required return is 14%. The intrinsic value of a share today is (number only, round to two decimal places):

Answer 1

Answer:

Explanation:

Intrinsic value in time = Dividend amount/(Required return-Dividend growth)

Intrinsic value in time = 2/(0.14-0.06) = 25

Intrinsic value today = Intrinsic value in time / (1 + required rate of return) ^ 2

Intrinsic value today = 25 / (1 + 0.14) ^ 2

Intrinsic value today = 25 / (1.14) ^ 2  = 25 / 1.2996  = 19.2366