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Question: Flag A company pays following dividends: D1 (dividend in year 1/next year) is $6, D2(dividend in year 2) is $7, D3(dividend in year 3) is $8, and dividend grows at 3% thereafter. The required rate of return is 10%, use 2-stage DDM to estimate the intrinsic value of stock at the current year. –Free Chegg Question Answer

Flag A company pays following dividends: D1 (dividend in year 1/next year) is $6, D2(dividend in year 2) is $7, D3(dividend in year 3) is $8, and dividend grows at 3% thereafter. The required rate of return is 10%, use 2-stage DDM to estimate the intrinsic value of stock at the current year.

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Answer


D1 = $6

D2 = $7

D3 = $8

Growth rate after this = 3%

r = 10%

Intrinsic value of stok today = D1/(1+r) + D2/(1+r)^2 + ….

= 6/1.1 + 7/(1.1)^2 + 8/(1.1)^3 + 8(1.03)/(1.1)^4 + ….

= 6/1.1 + 7/(1.1)^2 + [8/(1.1)^2][1/(0.1 – 0.03)]

= $105.69

Hence, intrinsic value of stock today = $105.69


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