Sadly, my textbook does not explain (to my level of satisfaction) how to arrive to this. My accompanying excel worksheet only goes out 3 years. Any assistance is appreciated.
I’m assuming Horizon value is terminal value.
PV of the stock (intrinsic value) is the summation of all future cash flows, which is a two stage DDM.
Terminal value would be the present value of the constant growth model for the perpetuity period. The TV is
V5 = D6 / r-g = D5 * (1.0402) / (0.134 - 0.0402)
Then you get the PV or V0 of the V5, which would be V5/ (1 + 0.134) ^ 5
The PV of the first stage would be the PV of D3,D4,D5 discounted at their required returns for their period (3,4,5).
V0 = PV(D3,D4,D5) + PV5
For the second question the expected return is 14.4%, which is the return of price appreciation and dividends recieved (CGY and DY).
So you calculate V2 (which is V0 in this case) using the same methods as above. Find out the price, divide the dividends of year 3 ($4.00) by the present value to give you the DY3, and the rest of the 14.4% expected return would be from CGY3 (14.4% - DY3%)
OK the answer choices don’t match those calculations
The choices are
Horizon Value : $45.31 $55.02 $64.73 $77.68
Current Intrinsic Value : $43.29 $40.55 $13.77 $44.67
Expected Dividend Yield (DY3): 9.02% 9.24% 7.36% 11.16%
Expected Capital Gains Yield (CGY3): -3.34% 13.44% 13.33% 7.04%
Thank you again
I checked the first one. It’s 64.73, you do the rest.
D4= 4 * 1.208
D6=4*(1.208^2)*(1.0402) = 6.07
V5 (Terminal value) = 6.07 / (.134-.0402) = $64.73
Nice post and here’s a lot to learn thnks for sharing this.