Specifically BA II. Is it possible to calculate this without doing the problem by hand?
An investor gathers the following information about a company:
Current dividend per share
$3
Historical annual dividend growth rate
4%
Expected annual dividend growth rate for the next three years
8%
Expected stock value per share at the end of Year 3
$33
If the investors’ required rate of return is 15%, the current estimate of the intrinsic value per share is closest to
You’ll still have to calculate the individual dividends, then use them as cash flows in an NPV calculation. Here, the cash flows are $3.24, $3.50, and $36.78, and the NPV is:
$3.24/1.08 + $3.50/1.08² + $36.78/1.08³ = $29.65.
$3.24/1.15+ $3.50/1.15² + $36.78/1.15³ = $29.65
I was in class today, typing that whilst my students were working on their in-class assignments. I firmly believe that there are gremlins in the school computer that changed all of my _15%_s to _8%_s.
That’s my story, and I’m sticking to it.
So you calculate the future cashflows, then discount them back at the required rate of return. I get that, but what’s the reasoning behind leaving out the current divident of $3? It was already paid?
Yup.
CFA Institute’s practice is to treat D0 as if it were paid yesterday.