Question

An investor has examined Home Depot stock and makes the following predictions for the future: YEAR 1 2 3 4 DIVIDEND $1.31 $1.58 $1.54 $1.56 The investor believes the selling price in four years will be $76.25. If the investor wants a 18.00% return to hold the stock, what intrinsic value does the investor put on Home Depot today

Answer 1

Answer: $43.32

Explanation:

The Intrinsic value of Home Depot Stock will be the present value of all the future cashflows from the stock.

Discounting with a rate of 18%, the intrinsic value is;

= 1.31/ ( 1 + 18%) + 1.58 / ( 1 + 18%)² + 1.54/ ( 1 + 18%)³ + 1.56 ( 1 + 18%) ⁴ + 76.25 / ( 1 + 18%) ⁴

= 1.11 + 1.1347 + 0.937 + 0.8046 + 39.3289

= 43.3152

= $43.32