Question

Amazon Inc. does not currently pay a dividend. Analysts expect Amazon to commence paying annual dividends in three years. The first dividend is expected to be​ $2 per share. Dividends are expected to grow from that point at an annual rate of​ 4% in perpetuity. Investors expect a​ 12% return from the stock. What should the price of the stock be​ today?

Answer 1

Answer:

Intrinsic value of the amazon stock today $   24.12

Explanation:

We will calculate the future dividends value considering the gordon model

$\frac{divends}{return-growth} = Intrinsic \: Value$

$\frac{2}{0.12-0.04} = Intrinsic \: Value$

Value = 25

This is 3 years from now so we must discount using the present value of a lump sum formula:

$\frac{Principal}{(1 + rate)^{time} } = PV$

$\frac{25}{(1 + 0.012)^{3} } = PV$  

PV   24.12

This will be the intrinsic value of the stock today