John Smith has been directed to determine the value of Widgets stock. John believes that...
90.2K
Verified Solution
Link Copied!
Question
Finance
John Smith has been directed to determine the value of Widgets stock. John believes that Widgets dividends will grow at 10% per year for the first three years and at 2% thereafter. Widget paid a dividend of $1.50 in the most recent year (D0). In addition, the risk-free rate is 3% and the expected market premium is 5%. John has estimated Widgets beta to be 0.8.
a. Calculate the required rate of return k for Widget (cost of equity).
b. Estimate the intrinsic value of Widget by using the two-stage dividend discount model:
What are the dividends in Year 1, Year 2, and Year 3?
What is the intrinsic value in Year 3 (when it reaches a constant growth rate)?
What is the current intrinsic value (in Year 0)?
please explain and show steps
Answer & Explanation
Solved by verified expert
Get Answers to Unlimited Questions
Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!
Membership Benefits:
Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
