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Answer: $108.86
The correct answer is **C. $108.86**. This represents the terminal value at the end of Year 3, calculated as follows: 1. **Year 4 Dividend (D4)**: The initial dividend of $3 grows at 20% for three years and then at 5% for one year: \[ D4 = 3 \times (1.2)^3 \times (1.05) = 5.4432 \] 2. **Terminal Value (V3)**: Using the Gordon growth model: \[ V3 = \frac{D4}{r - g_L} = \frac{5.4432}{0.10 - 0.05} = 108.864 \] This rounds to **$108.86**. **Why not A or B?** - **A. $81.79**: This is the present value of the terminal value at Year 3, discounted back to today, not the value at Year 3. - **B. $92.53**: This is the current intrinsic value, including the present values of dividends for the first three years and the terminal value, not the value at Year 3.
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A company's current dividend (D0) of $3 per share is expected to grow at 20% annually for the next three years, followed by a perpetual growth rate of 5%. Given a required rate of return of 10%, the intrinsic value of the stock at the end of Year 3, calculated using a multistage dividend discount model, is closest to:
A
$81.79
B
$92.53
C
$108.86