Question

The company's eps and dividends are expected to grow 5 percent per year. thecurrent payout ratio is maintained. the current dividend is $1.50 per share perquarter. the company's beta is 1.25. the risk-free rate is 6 percent, and the marketequity risk premium is 5 percent. calculate the company intrinsic value using thegordon growth method (constant growth dividend discount model).

a. $41.72
b. $45.70
c. $82.76
d. $86.90

Answer 1

To calculate the intrinsic value of a company using the Gordon Growth method, you need to use the formula: Intrinsic Value = Dividends per share / (Required Rate of Return - Dividend Growth Rate). Given the values, the intrinsic value of the company is $41.72.

Step-by-step explanation:

To calculate the intrinsic value of a company using the Gordon Growth method, you need to use the formula:

Intrinsic Value = Dividends per share / (Required Rate of Return - Dividend Growth Rate)

Given:

• Dividends per share = $1.50 per quarter
• Dividend Growth Rate = 5%
• Required Rate of Return = Risk-free rate + Beta * Equity Risk Premium
• Risk-free rate = 6%
• Beta = 1.25
• Equity Risk Premium = 5%

Let's calculate the Required Rate of Return:

Required Rate of Return = 6% + 1.25 * 5% = 12.25%

Now, substitute the values into the formula:

Intrinsic Value = $1.50 / (12.25% - 5%)

Intrinsic Value = $41.72