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Mashutka [201]
3 years ago
11

You wish to earn a return of 11% on each of two stocks, A and B. Stock A is expected to pay a dividend of $3 in the upcoming yea

r while stock B is expected to pay a dividend of $2 in the upcoming year. The expected growth rate of dividends for both stocks is 4%. Using the constant growth DDM, the intrinsic value of stock A ____________.a. will be higher than the intrinsic value of stock B
b. will be the same as the intrinsic value of stock B
c. will be less than the intrinsic value of stock B
d. more information is necessary to answer this question
Business
1 answer:
Anarel [89]3 years ago
6 0

Answer:

The intrinsic value of A -$44.57 is higher than that of B- $ 29.71

Explanation:

<em>The intrinsic value is the present value of he expected future dividend discounted at he required rate of return.</em>

<em>So, we would work out the intrinsic value of the two stocks using the the formula below:</em>

Intrinsic value  = D× (1+r)/(k-g)

Intrinsic value of stock A

D-3, r-11%, g-4%

= 3 ×(1.04)/(0.11-0.04)

=$44.57

Intrinsic value of stock B

D-2, r-11%, g-4%

= 2 ×(1.04)/(0.11-0.04)

= $29.71

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