Voiteo corporation has paid dividend of 1.10 per share and the stock is selling
ID: 2767315 • Letter: V
Question
Voiteo corporation has paid dividend of 1.10 per share and the stock is selling for $24. During the past year, the company's EPS was $2.40 Joe expect Voiteo Corp dividends to grow 10% annually for the next two years. After two years , he expect dividend growth to decline to a long term of 3%. He believes the appropriate required return for this stock is 12%. Determine joe's intrinsic value estimate , should he recommend to purchase the stock ?Voiteo corporation has paid dividend of 1.10 per share and the stock is selling for $24. During the past year, the company's EPS was $2.40 Joe expect Voiteo Corp dividends to grow 10% annually for the next two years. After two years , he expect dividend growth to decline to a long term of 3%. He believes the appropriate required return for this stock is 12%. Determine joe's intrinsic value estimate , should he recommend to purchase the stock ?
Joe expect Voiteo Corp dividends to grow 10% annually for the next two years. After two years , he expect dividend growth to decline to a long term of 3%. He believes the appropriate required return for this stock is 12%. Determine joe's intrinsic value estimate , should he recommend to purchase the stock ?
Explanation / Answer
According to the DDM (dividend distribution model), the price in calculated as follows
D0 = 1.10
D1 = 1.10*1.10 = 1.21
D2 = 1,21*1.1 = 1.331
D3 = 1.331*1.03 = 1.37093
Hence, The price in year 2 = P2 = D3/(Ke-g) where ke = 0.12 and g = 0.03
P2 = 1.37093/(0.12-0.03) = 15.23256
Intrinsic value of the stock = 1.21/1.12 + 1.331/1.12^2 + 15.23256/1.12^2 = 14.2847 = $14.28
Intrinsic value of the stock = 14.28
Since the price is higher than the intrinsic value, it is recommended, he should not purchase the stock
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