A company pays following dividends: D1 (dividend in year 1/next year) is $7, D2(dividend in year 2) is $8, D3(dividend in year 3) is $12.38. Thereafter, the dividend will grow at a constant rate. SupposeROE will be 20% with dividend and EPS will being $12.75 and $15 in year 4 respectively. The required rate of return is 10%, use 2-stage DDM to estimate the intrinsic value of stock at the current year.
Dividend of non constant growth stage
Discount factors
Dividend for year 1 $7.00
Discount factor 0.909091
Present value $ 6.36
Dividend year 2 8.00
Discount factor 0.826446
Present value $ 6.61
Dividend for year 3 $12.38
Discount factor 0.751315
Present value $ 9.30
Total present value $22.28
Present value of dividend of constant growth stage.
Dividend of year 4 $12.75(Given in the question)
Growth rate 3%
Required Return 10%
Discount Factor of year 3 0.751315
Present value DF3
$136.85
Growth rate ROE retention rate 20% 15% 3%
Current value of stock Present Value of dividends
Value of stock $22.28 $136.85 $159.12
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