Question

Your broker has recommended that you purchase stock in Alacan, Inc. She estimates that the 1-year target price is $63.00, and Alacan consistently pays an annual dividend of $7.00. Based on your analysis, you estimate that the stock has a required rate of 15.00%. What is the intrinsic value of this stock?

Answer 1

Answer:

$60.87

Explanation:

You can solve this question using time value of money concept. Since this is a  dividend paying stock, the recurring dividends are annuities, next year's price is the future value, total duration is 1 year. Use these to calculate the current price; PV

Total duration; N = 1

Interest rate per year ; I/Y = 15%

Future value; FV = 63

Recurring dividend payment; PMT = 7

then compute the present value; CPT PV = 60.87

Therefore, the intrinsic value of this stock is $60.87