Asked by Mariah Donnally on Jul 21, 2024
Verified
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?
A) $25
B) $16.87
C) $19.24
D) $20.99
Intrinsic Value
The estimated true value of an asset, based on underlying perceptions of its true financial performance and future prospects.
Required Return
The lowest yearly percent return on an investment necessary to attract individual or corporate investors to a specific security or project.
- Correct application of the constant-growth dividend discount model (DDM) is expected.
Verified Answer
IŠ
Imrañ Š?ataratJul 23, 2024
Final Answer :
C
Explanation :
Intrinsic value at time 3 = $2*(1+0.06)/(0.14−0.06) = $26.50 plus $2 dividend paid in year 3
Intrinsic value today = $28.50/(1.14)3 =$19.24
Intrinsic value today = $28.50/(1.14)3 =$19.24
Learning Objectives
- Correct application of the constant-growth dividend discount model (DDM) is expected.