Explanation:
The correct answer is C. $108.86. This represents the terminal value at the end of Year 3, calculated as follows:
Year 4 Dividend (D4): The initial dividend of $3 grows at 20% for three years and then at 5% for one year:
Terminal Value (V3): Using the Gordon growth model:
This rounds to $108.86.
Why not A or B?
$81.79: This is the present value of the terminal value at Year 3, discounted back to today, not the value at Year 3.$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.Ultimate access to all questions.
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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