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The High Flying Company just paid a dividend of $1
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
Expert Solution
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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