A firm is planning on paying its first dividend of $2 after two years.Then dividends are expected to grow at 6% per year indefinitely.The stock's required return is 14%.What is the intrinsic value of a share today?

Question

Quizplus · Accepted Answer

Using the Gordon Growth Model, we can calculate the intrinsic value of the share today:

V0 = D1 / (r - g)

where
D1 = expected dividend in one year = D0 × (1 + g) = $2 × (1 + 6%) = $2.12
D0 = current dividend = $0 (none paid yet)
r = required return = 14%
g = expected growth rate = 6%

V0 = $2.12 / (0.14 - 0.06) = $19.24

Therefore, the intrinsic value of the share today is $19.24. The correct answer is C.

A Firm Is Planning on Paying Its First Dividend of $2