Answer:
a.
1st $5.43
2nd $5.89
3rd $6.39
4th $6.93
5th $7.52
6th $7.81
b.
$75.85
Explanation:
Dividend is the payment to the stockholders out of earning of the company. Companies have a dividend policy which determine the future dividend payments.
Dividend of each year can be calculated by using the growth rate as a discount in the compounding formula.
Dividend Payment
First year = $5 x ( 1 + 8.5% )^1 = $5.43
Second year = $5 x ( 1 + 8.5% )^2 = $5.89
Third year = $5 x ( 1 + 8.5% )^3 = $6.39
Fourth year = $5 x ( 1 + 8.5% )^4 = $6.93
Fifth year =$5 x ( 1 + 8.5% )^5 = $7.52
Sixth year = $7.52 x ( 1 + 3.8% )^1 = $7.81
b.
Intrinsic value of the stock is the present value of all the associated dividends
We need to calculate the present value of all the dividend payment.
First year = $5.43 x ( 1 + 11.5% )^-1 = $4.87
Second year = $5.89 x ( 1 + 11.5% )^-2 = $4.74
Third year = $6.39 x ( 1 + 11.5% )^-3 = $4.61
Fourth year = $6.93 x ( 1 + 11.5% )^-4 = $4.48
Fifth year = $7.52 x ( 1 + 11.5% )^-5 = $4.36
After fifth year the dividend will be discounted as follow
PV of dividend after fifth year = [ $7.81 / (11.5% - 3.8%) ] x [ (1+11.5%)^-6 ] = $52.79
Intrinsic Value of Stock = Sum of PV of all dividends = $4.87 + $4.74 + $4.61 + $4.48 + $4.36 + $52.79 = $75.85
