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Answer: $21.82.
This question uses a **two-stage Dividend Discount Model (DDM)**. #### Given: - **D₁ = $2.00** - **D₂ = $2.10** - **From Year 3 onward: D₃ = $2.21 (constant forever)** - **Required return (r) = 10%** --- ### Step 1: Present value of early dividends - PV(D₁) = 2.00 / 1.10 = **1.82** - PV(D₂) = 2.10 / 1.10² = **1.74** --- ### Step 2: Terminal value at end of Year 2 From Year 3 onward, dividends form a **zero‑growth perpetuity**: \[ \text{Terminal Value at } t=2 = \frac{D_3}{r} = \frac{2.21}{0.10} = 22.10 \] --- ### Step 3: Discount terminal value to today - PV(TV) = 22.10 / 1.10² = **18.26** --- ### Step 4: Intrinsic value today \[ 1.82 + 1.74 + 18.26 = \mathbf{21.82} \] --- ### Conclusion - **Correct intrinsic value: $21.82 (Option A)** - **Option B ($22.10)** is only the value **at Year 2**, not today. - **Option C ($27.31)** assumes incorrect timing or growth.
Author: LeetQuiz .
An analyst gathers the following information about a company's common stock:
| Dividend per share-Year 1 | $2.00 |
|---|---|
| Dividend per share -Year 2 | $2.10 |
| Annual dividend per share-Year 3 and beyond | $2.21 |
If the required rate of return is 10%, the intrinsic value per share is closest to:
A
$21.82.
B
$22.10.
C
$27.31.
