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you are evaluating a stock for purchase. you estimate that the firm will pay the following...

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Finance

you are evaluating a stock for purchase. you estimate that thefirm will pay the following dividends in the coming years:

Year 1: $2

Year 2: $2.50

Year 3: $3

After the third year, the dividend is expected to grow at along-term rate of 8%. Your required rate of return is 10%.

A. What is the intrinsic value of this stock?

B. If you purchase the stock at $120 and your estimates (offuture dividends and prices) are correct, what is the EXPECTED RATEOF RETURN on your investment?

**PLEASE SHOW ALL WORK

Answer & Explanation Solved by verified expert
3.8 Ratings (589 Votes)
aIntrinsic value of this stock Step1 Dividend for the next 3 years Dividend in Year 1 D1 200 per share Dividend in Year 2 D2 250 per share Dividend in Year 3 D3 300 per share Step2 The Price of the stock in year 3 P3    See Answer
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Transcribed Image Text

you are evaluating a stock for purchase. you estimate that thefirm will pay the following dividends in the coming years:Year 1: $2Year 2: $2.50Year 3: $3After the third year, the dividend is expected to grow at along-term rate of 8%. Your required rate of return is 10%.A. What is the intrinsic value of this stock?B. If you purchase the stock at $120 and your estimates (offuture dividends and prices) are correct, what is the EXPECTED RATEOF RETURN on your investment?**PLEASE SHOW ALL WORK

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