MBA Inc. will pay a dividend for the first time at the end of 2013. It projects the following dividend per share:
2013 $1.50
2014 $2.00
2015 $2.50
Beginning with 2016 dividends will grow at 4% per year. The required rate of return is 12%. The intrinsic value of MBA shares is

Question

Quizplus · Accepted Answer

To calculate the intrinsic value of MBA shares, we need to use the dividend discount model (DDM):

Intrinsic Value = [D1 / (r - g)]
Where,
D1 = Expected dividend next year = $2.00
r = Required rate of return = 12%
g = Growth rate of dividends = 4%

So, the intrinsic value of MBA Inc. shares can be calculated as follows:

Intrinsic Value = [$2.00 / (0.12 - 0.04)] = $27.85

Therefore, the best choice is B.

MBA Inc Will Pay a Dividend for the First Time at at the End