Question

Good Investments Company forecasts a $1.74 dividend for 2017, $1.87 dividend for 2018 and a $1.98 dividend for 2019 for Mountain Vacations Corporation. For all years after 2019, Good Investments Company forecasts that Mountain Vacations will pay a $2.10 dividend. Using the dividend discount valuation model determine the intrinsic value of Mountain Vacations Corporation, assuming the company's cost of equity capital is 7%. Select one: A. $24.48 B. $18.12 C. $27.91 D. $29.37

Answer 1

The correct option is D,$29.37

Step-by-step explanation:

The intrinsic value of the company is the present value of the dividends plus the present value of the terminal value in year 3

present of dividends=$1.74/(1+7%)+$1.87/(1+7%)^2+$1.98/(1+7%)^3=$ 4.88

Terminal value=dividend after year /cost of capital

=$2.10/7%=$30

present value of terminal value=$30 /(1+7%)^3=$ 24.49

Note that the discount factor of year 3 is applicable to the terminal value as well.

sum of present value of dividends and terminal value=$ 24.49+$4.88=$29.37