Share
Explore BrainMass

How do you calculate the expected intrinsic value of the stock for Xavier Company?

An analyst is estimating the intrinsic value of the stock of Xavier Company. The analyst estimates that the stock will pay a dividend of $1.75 a share at the end of the year (that is, = $1.75). The dividend is expected to remain at this level until 4 years from now (that is, = = = $1.75). After this time, the dividend is expected to grow forever at a constant rate of 6% a year (that is, = $1.855). The stock has a required rate of return of 13%.

Required: What is the expected intrinsic value of the stock one year from now, just after the dividend has been paid at t = 1? (That is, what is p^1 ?) (I mean ^ on top of p)

Solution Preview

An analyst is estimating the intrinsic value of the stock of Xavier Company.  The analyst estimates that the stock will pay a dividend of $1.75 a share at the end of the year (that is,   = $1.75).  The dividend is expected to remain at this level until 4 years from now (that is,   =   =   = $1.75).  After this time, the dividend is expected to grow forever at a constant rate of 6% a year (that is,   = $1.855).  The stock has a required rate of ...

Solution Summary

The solution shows how to determine the expected intrinsic value of the stock one year from now, given the value of dividends and the dividend growth rate, using the dividend discount model. This solution shows step-by-step calculations and the answer and is also provided as a copy in an attached excel file.

$2.19