Question

Amazon Inc. does not currently pay a dividend. Analysts expect Amazon to commence paying annual dividends in three years. The first dividend is expected to be​ $2 per share. Dividends are expected to grow from that point at an annual rate of​ 4% in perpetuity. Investors expect a​ 12% return from the stock. What should the price of the stock be​ today?

Answer 1

Intrinsic value of the amazon stock today $ 24.12

Step-by-step explanation:

We will calculate the future dividends value considering the gordon model

`(divends)/(return-growth) = Intrinsic \: Value`

`(2)/(0.12-0.04) = Intrinsic \: Value`

Value = 25

This is 3 years from now so we must discount using the present value of a lump sum formula:

`(Principal)/((1 + rate)^(time) ) = PV`

`(25)/((1 + 0.012)^(3) ) = PV`

PV 24.12

This will be the intrinsic value of the stock today