For the most recent year, GHI Company paid an annual dividend of $1.00. The company expects...

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For the most recent year, GHI Company paid an annual dividend of$1.00. The company expects dividends to grow by 15% for the nexttwo years, followed by 4 years of growth at 10% per year, beforedropping to a perpetual growth rate of 4% starting in year 7. Therequired return is 12%.
What is the intrinsic value per share of GHI stock?

Answer & Explanation Solved by verified expert

3.7 Ratings (408 Votes)

Intrinsic value of stock is $ 18.87

Working:

As per dividend discount model, value of stock is the present value of dividend.

Step-1:Present value of dividend of next 6 years

Year	Dividend	Discount factor	Present value
a	b	c=1.12^-a	d=b*c
1	$ 1.15	0.892857	$ 1.03
2	$ 1.32	0.797194	$ 1.05
3	$ 1.45	0.71178	$ 1.04
4	$ 1.60	0.635518	$ 1.02
5	$ 1.76	0.567427	$ 1.00
6	$ 1.94	0.506631	$ 0.98

Total			$ 6.11

Working:

Dividend of year :
1	$ 1.00	x	1.15	=	$ 1.15
2	$ 1.15	x	1.15	=	$ 1.32
3	$ 1.32	x	1.10	=	$ 1.45
4	$ 1.45	x	1.10	=	$ 1.60
5	$ 1.60	x	1.10	=	$ 1.76
6	$ 1.76	x	1.10	=	$ 1.94

Step-2:Present value of dividend after year 6

Present value	=	D6(1+g)/(Ke-g)DF6			Where,
	=	$ 12.75			D6	$ 1.94
					g	4%
					Ke	12%
					DF6	0.506631

Step-3:Value of stock

Value of stock	=	Present value of dividends
	=	$ 6.11	+	$ 12.75
	=	$ 18.87

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Transcribed Image Text

For the most recent year, GHI Company paid an annual dividend of$1.00. The company expects dividends to grow by 15% for the nexttwo years, followed by 4 years of growth at 10% per year, beforedropping to a perpetual growth rate of 4% starting in year 7. Therequired return is 12%.What is the intrinsic value per share of GHI stock?