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The High Flying Company just paid a dividend of $1

Finance

The High Flying Company just paid a dividend of $1.50 per share. The dividends are expected to grow at the rate of 20% per year for 3 years, then by 15% per year for 3 more years, before finally settling down to the industry average growth rate of 8.5%. If the risk-adjusted required rate of return on this stock is 16%, the stock's intrinsic value is:
Multiple Choice
$33.12
$35.00
$50
$16.90

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Please see the table below. All financials are in $. Please see the second row / column to understand the mathematics. The cells colored in yellow contain your answer.

Terminal value of all the future dividends from year 7 onward, at the end of year 6 = D7 / (r - g) =4.28 / (16% - 8.5%) = 57.03

Year, n Linkage 0 1 2 3 4 5 6 7
Dividends A         1.50        1.80      2.16         2.59       2.98      3.43       3.94    4.28
Growth rate g   20% 20% 20% 15% 15% 15% 8.5%
Terminal value B                 57.03  
PV factor C = 1.16^(-n)   0.8621 0.7432     0.6407 0.5523 0.4761 0.4104  
PV of dividends D = A x C   1.5517 1.6052 1.6606 1.6463 1.6321 1.6180  
PV of terminal value E = B x C             23.4072  
the stock's intrinsic value Sum of all D's + E 33.12              

Hence, the correct answer is the first option showing 33.12

 

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