Question

ABC Corp. has just paid a quarterly dividend of $0.35. ABC's dividends will grow by 5% for the next 4 quarters, and then grow by 0.4% thereafter. ABC has a quarterly required return of 4%.What is the intrinsic value of ABC stock?

Answer 1

The intrinsic value of ABC stock requires a two-stage dividend discount model calculation, considering initial growth of dividends for 4 quarters and then perpetual growth afterward. However, the calculation cannot be completed without additional information on the perpetual growth rate and company longevity.

Step-by-step explanation:

To calculate the intrinsic value of ABC Corp's stock with varying dividend growth rates, we need to use a two-stage dividend discount model. The stock will pay dividends that grow at 5% for 4 quarters and then grow at 0.4% indefinitely. We must discount these dividends back to their present value using the required quarterly return of 4%.

The first part involves calculating the present value of dividends for the initial 4 quarters. For the second part, we use the constant growth formula which requires calculating the dividend at the end of the initial growth phase and then using the perpetuity growth formula to find the present value of all subsequent dividends.

However, with the data provided for ABC Corp. we cannot complete the calculation due to insufficient data about the ongoing growth rate after the first 4 quarters, the longevity of the company, and lack of clarity on the application of the perpetual growth rate.

Answer 2

$11.58

Step-by-step explanation:

Given data :

quarterly dividend paid = $0.35

dividend growth for next 4 quarters = 5% = 0.05

dividend growth after 4 quarters = 0.4% = 0.004

quarterly return = 4%

calculate the intrinsic value of ABC stock

first we calculate the quarterly growth of the dividend

1st quarter = 0.35 * ( 1.05 ) = $0.3675

2nd quarter = 0.3675 * 1.05 = $0.3859

3rd quarter = 0.3859 * 1.05 = $0.4052

4th quarter = 0.4052 * 1.05 = $0.4255

fifth quarter = 0.4255 * 1.004 =$0.4272

value price after 4 quarter ( P4 ) = fifth quarter / ( quarterly return - growth after 4th quarter)

hence P4 = 0.4272 / ( 0.04 - 0.004 )

= 0.4272 / 0.036 = $11.87

intrinsic value = 0.3675 / 1.04 + 0.3859/1.04^2 + 0.4052/1.04^3 + 0.4255/1.04^4 + 11.87 / 1.04^4

intrinsic value = 0.3534 + 0.3568 + 0.3602 + 0.3637 + 10.15 = $11.58