ries CHAPTER 13 EQUITY VALUATION Problem 1 s a current annual dividend of $2 and
ID: 2803985 • Letter: R
Question
ries CHAPTER 13 EQUITY VALUATION Problem 1 s a current annual dividend of $2 and is expected to grow at 15% for two Delegation Specialist pay years and then at 3% thereafter. If the required return for Delegation Specialist is 75%, what is the intrinsic value of Delegation Specialist stock? Problem 2 Janny Company currently pays a dividend of $2.22, which is expected to grow indefinitely at 4%. If the current value of Janny's shares based on the constant-growth dividend discount what is the required rate of return? model is $35.02, Problem 3Explanation / Answer
1) two step dividend discount model problem:
Current Dividend = $ 2.00
Dividend after 1st year will be =D1 = $ 2.30 ($ 2x 1.15 – growing at 15 %)
Dividend after 2nd year will be =D2= = $ 2.645 ($ 2.30 x 1.15 – growing at 15%)
Since the growth in the first two years was 15% the value of dividend declared after 2 years will be $ 2.645 as calculated above
The second stage has a growth rate of 3% and hence the dividend value after 3rd year will be $ 2.645 x 1.03 = $ 2.724
Assuming this as the constant dividend for the rest of the company’ life of the company, we arrive at the present values as follows:
P0 = D / (i – g)
Where, P0 = Value of the stock/equity
D = Per-Share dividend paid by the company at the end of each year
i = Discount rate, which is the required rate of return* which an investor wants for the risk associated with the investment in equity as against investment in a risk-free security.
g = Growth rate
Discounted value of constant growth dividend at the end of year 2 = 2.724/(0.075-0.03) = 2.724/0.045 = $60.53
Value of stock today = D1/(1+0.075) + D2/(1+0.075)2 + 60.53/(1+0.075)2
=2.3/1.075 + 2.645/1.156 + 60.53/1.156 = 2.14 + 2.289 + 52.36 = $56.79
2) Constant growth dividend discount model:
P0 = D / (i – g)
Where, P0 = Value of the stock/equity
D = Per-Share dividend paid by the company at the end of each year
i = Discount rate, which is the required rate of return* which an investor wants for the risk associated with the investment in equity as against investment in a risk-free security.
g = Growth rate
35.02 = 2.22/(r-0.04)
: r-0.04 = 2.22/35.02 = 0.063
:r = 0.063+.04 = 0.103 = 10.3%
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