4,800 roiing ) m nval. 75.bes ly The stock for a start-up company probably will

Question

4,800 roiing ) m nval. 75.bes ly The stock for a start-up company probably will pay no dividends until exactly 8 years from today. At that time it will pay S6.20 per year forever. You assess the intrinsic value of the stock with a 8.7% discount rate. Find the stock's intrinsic value today. d. $45.39 e. $47.17 b. $41.77 c. S43.82 a. $39.74 5 The company preferred stock just yesterday paid its annual dividend of $4.15 per share. Today's share price is $41.23. You believe the dividend yield is abnormally high but that it will revert to its normal value of 5.80%. Your strategy is to buy the stock today and receive annual dividends for 4 years. Upon receiving the last dividend you expect the dividend yield will be normal. Your rategy is to sell the stock at that time Compute the ev nested annua no ta ofsah

Explanation / Answer

Answer: we will use the dividend discount model for the fixed dividend

Intrinsic value = Fixed dividend/ discount rate

Intinsic value at the starting of 8th year will be this

Intrinsic value = 6.20/0.087 = 71.26

Now to find the stock price today we will have to find the present value of this

Present value = value/(1 + dicount rate) ^( no of years)

Present value = 71.26/(1+0.087)^7

Present value = 39.74

No of years has been taken 7 as the intinsic value we calculated is at the starting of 8th year

Intrinsic value today is 39.74

option A is the anaswer

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