Question

Super Carpeting Inc. (SCI) just paid a dividend (D₀) of $3.12 per share, and its annual dividend is expected to grow at a constant rate (g) of 6.50% per year. If the required return (r s ) on SCI’s stock is 16.25%, then the intrinsic value of SCI’s shares is

Answer 1

Answer:

Intrinsic Value = $33.23

Explanation:

The intrinsic value of a stock using the dividend valuation model is the present value of the the future dividend expected from the stock discounted at the required rate of return.

This model is represented as follows  

D(1+g)/(r-g) = P  

Price, D- dividend payable in now, ke- required rate of return, g- growth rate

D- 3.12 , g-6.50% r-6.25%

Intrinsic value = (3.12× 1.065)/(0.1625-0.065)= $33.228

Intrinsic Value = $33.23