Question

You are an stock analyst hired to follow Jones Kenesyian Consulting (whose ticker is JK), the firm recently paid a dividend of $2 per share, and you expect JK to grow at 10% for the next 3 years afterwhich you make an assumption that it will grow at a constant rate of 5%. You required rate of return is 12%. What do you believe the intrisic value of the stock is today

Answer 1

Answer:

Price of stock today = $45.58

Explanation:

The price of a share can be calculated using the dividend valuation model  

According to this model the value of share is equal to the sum of the present values of its future cash dividends discounted at the required rate of return.  

If dividend is expected to grow at a given rate , the value of a share is calculated using the formula below:  

Price=Do (1+g)/(k-g)  

Do - dividend in the following year, K- requited rate of return , g- growth rate  

Step 1 : PV of dividend from year 1 to 3

PV = D × (1+r)^-n

D- dividend payable in a particular year

r- required rate of return

n- year

Year                                      PV of Dividend

1              2 × 1.1^1 × 1.12^(-1) = 1.96

2             2 × 1.1^2× 1.12^(-2) = 1.93

3             2 × 1.1^3 × 1.12^9-3)= 1.89

Step 2 : PV of dividend from year 4 to infinity

PV (in year 3 terms) of dividend= 2 × 1.1^3× 1.05/(0.12-0.05) = 55.90

PV in year 0 terms = 55.90  × 1.12^(-3) = 39.789

Total present Value = 1.96 +1.93  +1.89  + 39.789= 45.58

Price of stock today = $45.58