Seaside Toys currently earns $2.00 per share and currently pays $1.00 per share in dividends. It is expected to have a constant growth rate of 5 percent per year. The required rate of return is 15 percent. What is the intrinsic value of this stock?

Question

Quizplus · Accepted Answer

Using the constant growth formula:
intrinsic value = (dividend*(1+growth rate))/(required rate of return - growth rate)
= ($1*(1+0.05))/(0.15-0.05)
= $10.50
Therefore, the intrinsic value of this stock is $10.50. So, the best choice is D.

Seaside Toys Currently Earns $2