The Felix Corp. projects to pay a dividend of $.75 next year and then have it grow at 12% for the next 3 years before growing at 8% indefinitely thereafter. The equity has a required return of 10% in the market. The intrinsic value of the stock is:
A) $41.52.
B) $9.375.
C) $17.05.
D) $59.80.
E) $62.38.

Question

Quizplus · Accepted Answer

The intrinsic value of the stock is the present value of all future dividends. The dividends for the first 3 years are $.75, $.84, and $.94, respectively. The dividends for years 4 and beyond are $.94 * 1.08 = $1.01. The present value of the dividends for the first 3 years is:PV = $.75 / (1 + 0.10) + $.84 / (1 + 0.10)^2 + $.94 / (1 + 0.10)^3 = $2.37The present value of the dividends for years 4 and beyond is:PV = $1.01 / (0.10 - 0.08) = $52.63The intrinsic value of the stock is the sum of the present values of the dividends for the first 3 years and the present value of the dividends for years 4 and beyond:Intrinsic value = $2.37 + $52.63 = $55.00