Question

Find the intrinsic value of XYZ Inc. The DPS at the end of year 1 is $2.00; at the end of year 2 is $2.40; at the end of year 3 is $2.70. After the third year, the DPS grows at a constant rate of 5%. The required rate of return is 12%.

Answer 1

Answer: 34.33

Explanation:

Firstly, we'll calculate the terminal value

which willl be:

= 2.70 × (1+5%)/(12% - 5%)

= 2.70 x 1.05/(0.12 - 0.05)

= 40.5

Then, the intrinsic value will be:

= 2/1.12 + 2.4/1.12² + (2.7 + 40.5)/1.12³

= 34.33

Therefore, the the intrinsic value of XYZ Inc is 34.33