Assume that Genesis Healthcare, Inc. is a constant growth company whose last div

Question

Assume that Genesis Healthcare, Inc. is a constant growth company whose last dividend (Do, which was paid yesterday) was $2.00 and whose dividend is expected to grow indefinitely at a 6% rate. The discount rate is 13%. The stock is currently selling at $30.29.

Assume that Genesis Healthcare's dividend is expected to experience supernormal growth of 30% from Year 0 to Year 1, 20% from Year 1 to Year 2, and 10% from Year 2 to Year 3. After Year 3, dividends will grow at a constant rate of 6%. What is the stock's intrinsic value under these conditions and what are the expected dividend yield and capital gains yield during the first year?

Explanation / Answer

k = (D/S) + g where k = expected rate of return D = Dividend payment next year S = current stock value g = dividend growth rate D = 2*1.06/1.13 =1.876 k= (1.876/30.29) + 0.06 = 12.2%

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