Question

What was the intrinsic value of SmileWhite Co. stock when the analyst was evaluating the stock (that is in year 2008)

Answer 1

Answer: $28.96

Step-by-step explanation:

Using the Dividend discount model, the intrinsic value will be a sum of the present values of the dividends in addition to the present value when the dividends become constant.

First use CAPM to calculate the required return

= Risk free rate + Beta * (market return - risk free rate)

= 4.5% + 1.15 * (14.5% - 4.5%)

= 16%

The required return will be used to discount the dividends.

2009 dividends = 1.72 * 1.12 = $1.93

2010 = 1.93 * 1.12 = $2.16

2011 = 2.16 * 1.12 = $2.42

Dividends grow at 9% from 2011

Stock terminal value in 2011 = (2.42 * 1.09) / (16% - 9%) = $37.68

`= (1.93)/(1.16) + (2.16)/(1.16^(2) ) + (2.42)/(1.16^(3) ) +(37.68)/(1.16^(3))\\\\= 28.959397679`

= $28.96