You see a fast growing company that is estimated to have dividend growth of 20%,

Question

You see a fast growing company that is estimated to have dividend growth of 20%, 18%, and 16% over each of the next three years (20% in year 1, 18% in year 2, 16% in year 3). The company paid a dividend of $1.28 per share over the past twelve months. Dividends are expected to grow at a constant rate of 3.0% per year beginning in year 4 to perpetuity. The risk-free rate of return is 4% and the market risk premium (expected return on the S&P 500 minus the risk-free rate of return) is 6%. The stock has a beta of 1.25 versus the S&P 500. Calculate the intrinsic value of this stock using the two-stage dividend discount model. Can anyone show their work for this?

Can someone show their work for this?

Explanation / Answer

Return on equity =Rf+[Beta*market premium]

               = 4+ [1.25*6]

                = 4 + 7.5

                = 11.5%

Terminal value at year 3 : D3(1+g)/(Rs-g)

         = 2.1025(1+.03)/(.115-.03)

        = 2.1025 *1.03 / .085

        = $ 25.4774

**PVF11.5% = 1/(1+i)^n or can be find from present value table

year Dividend PVF @ 11.5% Dividend *PVF 1 1.536   [1.28(1+.20] .89686 1.3776 2 1.8125    [1.536(1+.18)] .80436 1.4579 3 2.1025    [1.8125(1+.16)] .72140 1.5167 Terminal value 25.4774 .72140 18.3794 Intrinsic value of stock 22.73

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