Question

DMC3 Inc. will pay no dividend for 2016 or 2017. At the end of 2018, it will pay a dividend of $1.50. Thereafter dividends will grow at 4% per year. The required rate of return is 10%. The intrinsic value of DMC3 shares is:________.A) $33.50. B) $34.53. C) $34.91. D) $35.21.

Answer 1

Answer:

no option is correct, the correct answer is $20.66

Explanation:

we can determine the value of DMC3 stock using an adjusted perpetuity formula:

present value = [dividend / (required rate - growth rate)] / (1 + required rate)²

= [$1.50 / (10% - 4%)] / (1 + 10%)² = ($1.50 / 6%) / 1.1² = $25 / 1.21 = $20.66