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25 October, 21:43

A firm is planning on paying its first dividend of $2 three years from today. After that, dividends are expected to grow at 6% per year indefinitely. The stock's required return is 14%. What is the intrinsic value of a share today

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  1. 25 October, 21:48
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    The intrinsic value of a share today is $16.87

    Explanation:

    Intrinsic Value of the share is calculated as below.

    Dividend Valuation method is used to value the stock price of a company based on the dividend paid, its growth rate and rate of return. The price is calculated by calculating present value of future dividend payment.

    Value of Share = Dividend / (Rate of return - Growth rate)

    placing values in the formula

    Value of share = $2 / (14% - 6%) = $25

    $25 is the value of share after 3 year, to calculate today's value we have to discount it as below

    Today's value of share = $25 x (1 + 14%) ^-3 = $16.87
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