Answer:
c.$29.37
Explanation:
First and foremost, it should be borne in mind that the intrinsic value of Mountain Vacations Corporation is the present value of its future dividends for the forecast period(2017-2019) plus the present value of dividend terminal value beyond the forecast period as shown thus:
Year 1 (2017) dividend $2.44
Year 2 (2018) dividend $2.62
Year 3 (2019) dividend $2.77
the terminal value of dividend=expected dividend per year after 2019/ cost of equity capital
expected dividend per year after 2019= $2.94
cost of equity capital =7%
terminal value=$2.94 /7%=$42.00
PV of future dividend=dividend/(1+cost of equity capital)^n
n is the year in which the future dividend is expected, it is 1 for 2017, 2 for 2018 , 3 for 2019 dividend and the terminal value(since the terminal value is already stated in 2019 terms)
intrinsic value of share=$2.44/(1+7%)^1+$2.62/(1+7%)^2+$2.77/(1+7%)^3+$42.00/(1+7%)^3
the intrinsic value of share=$41.11
It is obvious that the options are not correct
The question's inputs are wrong
2017 dividend should have been $1.74
2018 dividend should have been $1.87
2019 dividend should have been $1.98
dividend beyond 2019 should have been $2.10
terminal value=$2.10/7%=$30.00
intrinsic value of share=$1.74/(1+7%)^1+$1.87/(1+7%)^2+$1.98/(1+7%)^3+$30.00/(1+7%)^3
intrinsic value of share=$29.36(closest to c.$29.37)
