## Answers

Answer = A) | |||||||

Last Dividend | Growth Rate | Dividend of the year | |||||

D0= | 2 | ||||||

Dividend after the Year 1= D1 | $ 2.00 | 25% | $ 2.50 | ||||

Dividend after the Year 2 = D2 | $ 2.50 | 25% | $ 3.13 | ||||

Dividend after the Year 3 = D3 | $ 3.13 | 25% | $ 3.91 | ||||

Dividend after the Year 4 = D4 | $ 3.91 | 2.0% | $ 3.98 | ||||

Answer = B) | |||||||

CALCULATION OF THE INSTRINSIC VALUE OF THE SHARE | |||||||

Formula | P3 = D4 / Ke - g | ||||||

Ke = Cost of Equity = Expected return = 15% or = | 0.1500 | ||||||

g = Growth rate = 2.0% = or = | 0.02 | ||||||

P3 = price of the stock at the end of 3rd year | |||||||

P3 = | D4 | ( "/" By | Ke | (-) | Growth | ) | |

P3 = | $ 3.98 | ("/" By | 0.1500 | (-) | 0.02 | ) | |

P3 = | $ 3.98 | "/" By | 0.1300 | ||||

P3 = | $ 30.65 | ||||||

CALCLATION OF PRESENT VALUE OF THE STOCK | |||||||

Year | Dividend | PVF @ 15% | Present Value | ||||

1 | $ 2.50 | 0.86957 | $ 2.17 | ||||

2 | $ 3.13 | 0.75614 | $ 2.36 | ||||

3 | $ 3.91 | 0.65752 | $ 2.57 | ||||

Stock Value P3 | 3 | $ 30.65 | 0.65752 | $ 20.15 | |||

Total | $ 27.26 | ||||||

Answer = Intrinsic Value of the Stock = | $ 27.26 | ||||||

Answer =C) | |||||||

If the market price of the share is $ 30 than I will not advise to purhcase the share | |||||||

because the intinsic value of the shares is only $ 27.26 | |||||||

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