Investments

Question 1

XYZ Company currently pays a dividend of $2.20 per share. The dividend is expected to grow at a constant rate of 5% per year. If an investor has a 12% required rate of return on the stock what is the intrinsic value?

Answer 1

Intrinsic Value Formula Also Known as Constant Dividend Growth.

Step 1: Find D1

D1=D0(1+g)

D1=2.20(1+.05)=$2.31

Step 2: Apply the formula

V=D1(r−g)

V=2.31(.12−.05)=$33.00

Based on the above scenario, XYZ Company’s stock has an intrinsic value of $33.00 per share to this investor.