You wish to earn a return of 11% on each of two stocks,A and B. Stock A is expected to pay a dividend of $3 in the upcoming year while stock B is expected to pay a dividend of $2 in the upcoming year. The expected growth rate of dividends for both stocks is 4%. Using the constant growth DDM, the intrinsic value of stock A _________.

Question

Quizplus · Accepted Answer

Using the constant growth DDM formula, we can calculate the intrinsic value of both stocks:
Intrinsic Value = Dividend / (Required Rate of Return - Dividend Growth Rate)

For Stock A:
Intrinsic Value = 3 / (0.11 - 0.04) = $50

For Stock B:
Intrinsic Value = 2 / (0.11 - 0.04) = $33.33

Therefore, the intrinsic value of Stock A is higher than the intrinsic value of Stock B.

You Wish to Earn a Return of 11% on Each