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Question of the Week - Equity

AdaptPrepAdaptPrep Des Moines, IA, USAPosts: 211 Sr Associate
edited June 2015 in Level 1 Questions
You are provided the following information about a stock:
• Current price: $36.78
• Current annual dividend: $1.70
• Expected dividend growth rate: 4.5% for the next 2 years, 1.6% thereafter

If the required rate of return on this stock is 8.5%, the intrinsic stock value according to the two-stage dividend discount model is closest to:

Question of the Week - Equity 11 votes

$25
0%
$26
90%
AdaptPrepjmsatchwellThomasWKevinPicknrollecoffey123samin20kevtivRichie321TheClaw 10 votes
$27
9%
samyakjaroli 1 vote

Comments

  • AdaptPrepAdaptPrep Des Moines, IA, USAPosts: 211 Sr Associate
    $26

    The dividends each year are:

    D1 = 1.70 * 1.045 = 1.7765

    D2 = 1.70 * 1.045^2 = 1.8564

    D3 = 1.70 * 1.045^2 * 1.016 = 1.8861

     

    The terminal value at t = 2 is:

    V2 = 1.8861 / (0.085 – 0.016) = 27.3354

     

    The intrinsic value of the stock at t = 0 is:

    V0 = 1.7765 / 1.085 + 1.8564 / 1.085^2 + 27.3354 / 1.085^2 = 26.43

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