MBA Inc.will pay a dividend for the first time at the end of 2016.It projects the following dividend per share:
2016 $1.50
2017 $2.00
2018 $2.50
Beginning with 2016 dividends will grow at 4% per year.The required rate of return is 12%.The intrinsic value of MBA shares is

Question

Quizplus · Accepted Answer

To calculate the intrinsic value, we can use the dividend discount model:

PV = D1 / (1 + r) + D2 / (1 + r)^2 + D3 / (1 + r)^3 + ... + Dn / (1 + r)^n

where PV = present value, D = dividend per share for each year, r = required rate of return, and n = number of years.

Using the given data, we can calculate the intrinsic value as follows:

PV = 1.5 / (1 + 0.12) + (2.00 * 1.04) / (1 + 0.12)^2 + (2.50 * 1.04^2) / (1 + 0.12)^3
PV = 1.3393 + 1.5806 + 1.7235
PV = 4.6434

Therefore, the intrinsic value of MBA shares is $27.85 (rounded to the nearest cent), which is closest to answer choice B.

MBA Incwill Pay a Dividend for the First Time at the the End