Question

ABC Corp. has just paid a quarterly dividend of $0.35. ABC's dividends will grow by 5% for the next 4 quarters, and then grow by 0.4% thereafter. ABC has a quarterly required return of 4%.What is the intrinsic value of ABC stock?

Answer 1

Answer:

$11.58

Explanation:

Given data :

quarterly dividend paid = $0.35

dividend growth for next 4 quarters = 5% = 0.05

dividend growth after 4 quarters = 0.4% = 0.004

quarterly return = 4%

calculate the intrinsic value of ABC stock

first we calculate the quarterly growth of the dividend

1st quarter = 0.35 * ( 1.05 ) = $0.3675

2nd quarter = 0.3675 * 1.05 = $0.3859

3rd quarter = 0.3859 * 1.05 = $0.4052

4th quarter = 0.4052 * 1.05 =  $0.4255

fifth quarter = 0.4255 * 1.004 =$0.4272

value price after 4 quarter ( P4 ) = fifth quarter / ( quarterly return - growth after 4th quarter)

hence P4 = 0.4272 / ( 0.04 - 0.004 )

                = 0.4272 / 0.036 = $11.87

intrinsic value = 0.3675 / 1.04 + 0.3859/1.04^2 + 0.4052/1.04^3 + 0.4255/1.04^4  +  11.87 / 1.04^4

intrinsic value = 0.3534 + 0.3568 + 0.3602 + 0.3637 + 10.15 = $11.58