Question

You wish to earn a return of 13% on each of two stocks, x and y. Stock x is expected to pay a dividend of $3 in the upcoming year while stock y is expected to pay a dividend of $4 in the upcoming year. The expected growth rate of dividends for both stocks is 7%. The intrinsic value of stock x.

Answer 1

Based on the information given, the intrinsic value of stock x will be less than the intrinsic value of stock Y.

Based on the information given above, the intrinsic value of Stock X will be calculated thus:

D1 = Dividend in next year = $3

g = growth rate = 7%

r = = 13%

Therefore, intrinsic value of Stock X will be:

= D1 / (r-g)

= 3 / (13% - 7%)

= 3/6%

= 3 / 0.06

= $50

Therefore, the intrinsic value of stock X is $50.

Intrinsic value of Stock Y will be calculated thus:

D1 = $4

g = 7%

r = 13%

Intrinsic value of Stock Y will be:

= D1 / (r-g)

= 4 / (13% - 7%)

= 4/6%

= 4 / 0.06  

= 66.67

Intrinsic value of Stock Y is $66.67

Therefore, the intrinsic value of Stock X will be less than the intrinsic value of Stock Y.

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