Question

. Shellbridge Corporation common stock has a par value of $25 and recently paid a dividend of $3.16 per share. The firm's dividends have grown from $2.00 to $3.16 over the past 10 years, which also reflects the expected growth in dividends for the indefinite future. The stock is selling for $40 and you think a reasonable required rate of return is 12%. What is the stock's intrinsic value?

Answer 1

Answer:

Intrinsic value: $ 45.19290274

The stock is undervalued as is selling for less.

Explanation:

We use the gordon model to solve for the intrinsic value of the share.

$\frac{divends_1}{return-growth} = Intrinsic \: Value$

we must solve for the grow rate like  it was an interest rate:

grow rate:

$2.00 \times (1+g)^{10} = 3.16\\\sqrt[10]{\frac{3.16}{2.00}} -1 = g$

g = 0.046804808

dividends one year from now:

3.16 x (1 + 0.046804808) = 3.307903193

Now we calculate the instrinsic value:

$\frac{3.307903193}{0.10 - 0.046804808} = Intrinsic \: Value$

Value: $ 45.19290274

The stock is undervalued as is selling for less.