DMC3 Inc. will pay no dividend for 2013 or 2014. At the end of 2015, it will pay a dividend of $2.50.
Thereafter dividends will grow at 4% per year. The required rate of return is 12%. The intrinsic value of DMC3 shares is

Question

Quizplus · Accepted Answer

To calculate the intrinsic value, we need to use the dividend discount model:

IV = D1 / (r - g)

Where D1 is the next year's dividend, r is the required rate of return and g is the expected growth rate.

D1 = $2.50 x (1 + 0.04) = $2.60 (since the dividend grows at 4% per year)

IV = $2.60 / (0.12 - 0.04) = $24.91

Therefore, the intrinsic value of the DMC3 shares is $24.91 which is less than the current stock price. Therefore, the best choice is C.

DMC3 Inc Will Pay No Dividend for 2013 or 2014