Assumed to be computed without business calculator, please show your work as to

Question

Assumed to be computed without business calculator, please show your work as to how this is calculated.

Good Investments Company forecasts a $1.74 dividend for 2017, $1.87 dividend for 2018 and a 1.98 dividend for 2019 for Mountain Vacations Corporation. For all years after 2019, Good Investments Company forecasts that Mountain Vacations will pay a $2.10 dividend. Using the dividend discount valuation model determine the intrinsic value of Mountain Vacations Corporation, assuming the company's cost of equity capital is 7%. Select one: A. $18.12 B. $24.48 x C.$29.37 D. $27.91

Explanation / Answer

The correct answer is C. $ 29.37

Note :

1.Intrinsic Value of Share = Present value of Dividends + Present Value of Stock Price in Year 3

= $ 4.88 + $ 24.49

= $ 29.37

2. Present value of Dividends :

3. Present Value of Stock Price in Year 3:

= Expected Dividend / ( Required Return ) ] * Present Value of Discounting Factor ( 7% ,3 )

= [$ 2.1 / 7% ] * 0.816297877

= $ 24.49

Year Dividend Discounting Factor (7%) Present Value ( Dividend * Discounting factor) 1 1.74 0.934579439 1.626168224 2 1.87 0.873438728 1.633330422 3 1.98 0.816297877 1.616269796 Present Value of Dividends 4.88

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