Answer to Question #250845 in Finance for Sanchi

Question #250845

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.


1
Expert's answer
2021-10-17T16:45:48-0400

Dividend of non constant growth stage

Discount factors

=1.101=0.909091=1.10^{-1}=0.909091

=1.102=0.826446=1.10^{-2}=0.826446

=1.103=0.751315=1.10^{-3}=0.751315


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 == D4Keg×\frac{D4}{Ke-g}× DF3

=12.75(0.10.03)×0.751315=\frac{12.75}{(0.1-0.03)}×0.751315

== $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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