Suppose Walmart pays dividends once a year. It just paid out year 2017\'s divide

Question

Suppose Walmart pays dividends once a year. It just paid out year 2017's dividend of $2.04 per share. Analysts' concensus forecast about its future dividends is as below: $2.10 for year 2018, $2.20 for year 2019, $2.30 for year 2020, $2.40 for year 2021, and $2.50 for year 2022. After year 2022, Walmart's annual dividend payments will grow at a constant rate of 3%. Suppose Walmart shareholders' required return is 6%. Estiimate Walmart's intrinsic value. R 6.0% g 3.0% t Cash flow CF Amount PV 1 Dividend 1 2 Dividend 2 3 Dividend 3 4 Dividend 4 5 Dividend 5 5 Horizon value Intrinsic Value Suppose Walmart pays dividends once a year. It just paid out year 2017's dividend of $2.04 per share. Analysts' concensus forecast about its future dividends is as below: $2.10 for year 2018, $2.20 for year 2019, $2.30 for year 2020, $2.40 for year 2021, and $2.50 for year 2022. After year 2022, Walmart's annual dividend payments will grow at a constant rate of 3%. Suppose Walmart shareholders' required return is 6%. Estiimate Walmart's intrinsic value. R 6.0% g 3.0% t Cash flow CF Amount PV 1 Dividend 1 2 Dividend 2 3 Dividend 3 4 Dividend 4 5 Dividend 5 5 Horizon value Intrinsic Value

Explanation / Answer

D0 = 2.04

D1 = 2.1

D2 = 2.2

D3 = 2.3

D4 = 2.4

D5 = 2.5

D6 = 2.5*1.06 = 2.58

According to dividend-discount model,

P0 = D1/(R-G)

P0 = Current stock price

D1 - Dividend at t =1

R - Required rate

G - Growth rate

P5 = D6/(R-g) = 2.58/(0.06-0.03) = 85.833

P0 is calculated by discounting the future dividends and P5

P0 = 2.1/(1+0.06)^1 + 2.2/(1+0.06)^2 + 2.3/(1+0.06)^3 + 2.4/(1+0.06)^4 + 2.5/(1+0.06)^5 + 85.83/(1+0.06)^5 = 73.78

Intrinsic value, P0 = $73.78

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