Question

. Shellbridge Corporation common stock has a par value of $25 and recently paid a dividend of $3.16 per share. The firm's dividends have grown from $2.00 to $3.16 over the past 10 years, which also reflects the expected growth in dividends for the indefinite future. The stock is selling for $40 and you think a reasonable required rate of return is 12%. What is the stock's intrinsic value?

Answer 1

The intrinsic value of Shellbridge Corporation stock, calculated using the dividend discount model with the given growth rate and required return, is approximately $43.05 per share.

Step-by-step explanation:

The intrinsic value of a company's stock can be estimated by calculating the present value of the expected dividends. The question involves using the dividend growth model to find the intrinsic value of Shellbridge Corporation stock. Given that the dividends grew from $2.00 to $3.16 over 10 years, we can use the compound annual growth rate (CAGR) formula to find the growth rate, and then apply the dividend discount model (DDM) formula to find the intrinsic value.

We first calculate the CAGR of the dividends:

CAGR = (Ending Value / Beginning Value)^(1 / number of periods) - 1

In this case, the CAGR would be (3.16 / 2)^(1/10) - 1, which calculates to approximately 4.66% annual growth rate. Next, we use the DDM to find the intrinsic value:

Intrinsic Value = Dividend per share / (Required rate of return - Dividend growth rate)

Using the given values:

Intrinsic Value = $3.16 / (0.12 - 0.0466)

Intrinsic Value = $3.16 / 0.0734

Intrinsic Value = $43.05 per share

The intrinsic value of $43.05 represents what an investor might consider a fair price for the stock, given the required rate of return and the dividend growth rate.

Answer 2

Intrinsic value: $ 45.19290274

The stock is undervalued as is selling for less.

Step-by-step explanation:

We use the gordon model to solve for the intrinsic value of the share.

`(divends_1)/(return-growth) = Intrinsic \: Value`

we must solve for the grow rate like it was an interest rate:

grow rate:

`2.00 * (1+g)^(10) = 3.16\\\sqrt[10]{(3.16)/(2.00)} -1 = g`

g = 0.046804808

dividends one year from now:

3.16 x (1 + 0.046804808) = 3.307903193

Now we calculate the instrinsic value:

`(3.307903193)/(0.10 - 0.046804808) = Intrinsic \: Value`

Value: $ 45.19290274

The stock is undervalued as is selling for less.