Each of two stocks, A and B, are expected to pay a dividend of $5 in the upcoming year. The expected growth rate of dividends is 10% for both stocks. You require a rate of return of 11% on stock A and a return of 20% on stock B. The intrinsic value of stock A

Question

Everett Merritt

Business

10 December, 19:00

Each of two stocks, A and B, are expected to pay a dividend of $5 in the upcoming year. The expected growth rate of dividends is 10% for both stocks. You require a rate of return of 11% on stock A and a return of 20% on stock B. The intrinsic value of stock A

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Aditya Wilcox · Answer 1

The intrinsic value of Stock A is 500

Explanation:

According to the DDM method the formula for calculating the intrinsic value of a stock is

Upcoming Dividend/Required rate of return - Growth rate of stock.

Upcoming Dividend of Stock A = 5

Required rate of return on Stock A = 11% or 0.11

Growth rate on stock A = 10% or 0.10

Intrinsic value of stock A=

5 / (0.11-0.10) = 5/0.01=500

The intrinsic value of Stock A is 500