Question

due to an extensive investment in research and development, banana, inc., recently developed a new wireless communication system that should greatly increase the stock's dividend. one analyst believes the current annual dividend of $1 will increase by 20% for each of the next three years and then 6% for the foreseeable future. calculate the intrinsic value per share of the company's stock assuming an investor's required rate of return of 8%

Answer 1

The intrinsic value per share of the company's stock is $76.42.

How to calculate the intrinsic value per share of stock?

D0 = current annual dividend = 1

Dividend growth = 20% = 0.2

G = foreseeable future = 6% = 0.06

r = rate of return = 8% = 0.08

D$_{n}$ = dividend year n

Intrinsic value is a true value of the stocks. Intrinsic value can be calculated by this formula

$\frac{D_{1}}{(1+r)^1}+\frac{D_{2}}{(1+r)^2}+\frac{D_{3}}{(1+r)^3}+\frac{\frac{D_{3}(1+G)}{r-G}}{(1+r)^3}$

with formula to calculate dividend is

$D_{n}$ = D0 × $\text{(1 + Dividend growth)}^2$

Intrinsic value = $\frac{(D0)\text{(1 + dividend growth)}^1}{(1+r)^1}+\frac{(D0)\text{(1 + dividend growth)}^2}{(1+r)^2}+\frac{(D0)\text{(1 + dividend growth)}^3}{(1+r)^3}+\frac{\frac{(D0)\text{(1 + dividend growth)}^3(1+G)}{r-G}}{(1+r)^3}$

= $\frac{(1)(1+0.2)^1}{(1+0.08)^1}+\frac{(1)(1+0.2)^2}{(1+0.08)^2}+\frac{(1)(1+0.2)^3}{(1+0.08)^3}+\frac{\frac{(1)(1+0.2)^3(1+0.06)}{0.08-0.06}}{(1+0.08)^3}$

= $\frac{1.2}{1.08}+\frac{1.44}{1.1664}+\frac{1.728}{1.259712}+\frac{\frac{(1.728)(1.06)}{0.02}}{1.259712}$

= 1.11 + 1.2346 + 1.3717 + 72.7023

= $76.42

Thus, the intrinsic value per share of the company's stock is $76.42.

Learn more about intrinsic value here:

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