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# Answer to Question #250845 in Finance for Sanchi

Question #250845

A company pays following dividends: D1 (dividend in year 1/next year)Â isÂ $7, D2(dividend in year 2) is$8, D3(dividend in year 3) isÂ $12.38.Â Thereafter, the dividend will grow at a constant rate.Â SupposeROE will be 20%Â withÂ dividend and EPS will beingÂ$12.75 and $15Â in year 4Â respectively.Â The required rate of return is 10%,Â use 2-stage DDM toÂ estimate the intrinsic value ofÂ stock atÂ the current year. 1 Expert's answer 2021-10-17T16:45:48-0400 Dividend of non constant growth stage Discount factors "=1.10^{-1}=0.909091" "=1.10^{-2}=0.826446" "=1.10^{-3}=0.751315" Dividend for year 1"="$7.00

Discount factor"=" 0.909091

Present value"=" $6.36 Dividend year 2 "=" 8.00 Discount factor"=" 0.826446 Present value"="$ 6.61

Dividend for year 3"=" $12.38 Discount factor"=" 0.751315 Present value"="$ 9.30

Total present value "=" $22.28 Present value of dividend of constant growth stage. Dividend of year 4"="$12.75(Given in the question)

Growth rate"=" 3%

Required Return"=" 10%

Discount Factor of year 3"=" 0.751315

Present value "=" "\\frac{D4}{Ke-g}\u00d7" DF3

"=\\frac{12.75}{(0.1-0.03)}\u00d70.751315"

"=" $136.85 Growth rate"=" ROE"\u00d7" retention rate"=" 20%"\u00d7" 15%"=" 3% Current value of stock"=" Present Value of dividends Value of stock"="$22.28"+" $136.85"="$159.12

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