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Intrinsic Value of Beranek Technologies

You are an analyst studying Beranek Technologies, which was founded 10 years ago. It has been profitable for the last 5 years, but it has needed all of its earnings to support growth and thus has never paid a dividend. Management has indicated that it plans to pay a $0.50 dividend 3 years from today, then to increase it at a relatively rapid rate for 2 years, and then to increase it at a constant rate of 8.00% thereafter. Your forecast of the future dividend stream, along with the forecasted growth rates, is shown below. Assuming a required return of 11.00%, what is your estimate of Beranek's current intrinsic value?

Year: 0 1 2 3 4 5 6 7
Growth Rate: NA NA NA NA 50.00% 25.00% 8.00% 8.00%

A. $19.88
B. $20.39
C. $20.91
D. $21.44
E. $21.98

Solution Preview

The current intrinsic value is the PV of all dividends
The dividends are
Year 3 0.50
Year 4 0.50X1.5 = ...

Solution Summary

The solution explains how to calculate the intrinsic value of the firm.