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The Duo Growth Company just paid a dividend of $1.2 per share. The dividend is expected...

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Finance

The Duo Growth Company just paid a dividend of $1.2 per share.The dividend is expected to grow at a rate of 24% per year for thenext 3 years and then to level off to 6% per year forever. Youthink the appropriate market capitalization rate is 21% peryear.

a. What is your estimate of the intrinsic value of a share ofthe stock?

b. If the market price of a share is equal to this intrinsicvalue, what is the expected dividend yield?

c. What do you expect its price to be 1 year from now? Is theimplied capital gain consistent with your estimate of the dividendyield and the market capitalization rate?

Answer & Explanation Solved by verified expert
3.5 Ratings (498 Votes)
Answer a D0 12 Growth rate for first 3 years is 24 followed by a constant growth rate g of 6 forever D1 1200 124 1488 D2 1488 124 184512 D3 184512 124 228795    See Answer
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The Duo Growth Company just paid a dividend of $1.2 per share.The dividend is expected to grow at a rate of 24% per year for thenext 3 years and then to level off to 6% per year forever. Youthink the appropriate market capitalization rate is 21% peryear.a. What is your estimate of the intrinsic value of a share ofthe stock?b. If the market price of a share is equal to this intrinsicvalue, what is the expected dividend yield?c. What do you expect its price to be 1 year from now? Is theimplied capital gain consistent with your estimate of the dividendyield and the market capitalization rate?

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