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Intrinsic Value of Common Stock - Dividend Growth Method

Use the dividend growth model to calculate the intrinsic value of MNQ Company's common stock in 2008.

Determine whether the stock is undervalued, overvalued, or fully valued. Justify the assumptions that you make.

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Solution Preview

The dividend growth model is designed to use the past performance of a company's stock to determine its future growth. Suppose a stockholder is interested in a 10% annual return of stock. She can determine whether or not there is consistent growth in a company by the use of a formula, and applying it to the prospective company's financial statements.

The Gordon Constant Growth Model is a useful general guide, although in a real company growth is neither constant nor consistent.

The current dividend is the latest dividend payout per share.
Growth of the dividend (per year - the five year dividend growth can give you a good idea)
Required rate of return: What you "need" the investment to return in order for you to think it worth it to purchase the stock. (We will say 10%)
Plugging in the numbers ...

Solution Summary

This describes the dividend growth model, a variation of present value, to determine the ability of a company to provide a minimum level of annual growth in common stock dividends.