Question

Supernommal GMR Inc expects to pay the following dividends over the next three years: 5400$4.40, and $4.84. After that, Supernommal GMR's dividends will grow at a constart rate of 3% thereafter (to Infinity and beyond. Supernormal GMR's shareholders require a return of 7%, what is the intrinsic price of one share of Supernormal GMA's stock?

Answer 1

Given that Supernommal GMR Inc expects to pay the following dividends over the next three years: $5, $4.40, and $4.84, and the dividends will grow at a constant rate of 3% thereafter. Supernormal GMR's shareholders require a return of 7%. We need to determine the intrinsic price of one share of Supernormal GMA's stock.Dividend, D₁ = $5, D₂ = $4.40, D₃ = $4.84, growth rate, g = 3%, and required rate of return, r = 7%.The present value of dividend payments can be calculated using the formula given below:Present value = D₁/ (1 + r)¹ + D₂ / (1 + r)² + D₃/ (1 + r)³ + P₃/ (1 + r)³Where, P₃ is the expected share price at the end of year 3We can use the Gordon growth model to calculate the intrinsic price of the stock.Gordon Growth Model is given as:P₀ = D₁ / (r - g)Where,P₀ is the intrinsic price of one share of the stockP₀ = $5 / (0.07 - 0.03)P₀ = $125So, the intrinsic price of one share of Supernormal GMA's stock is $125.