At the end of the year 2011 the BRK Corporation paid dividends $0.25 per share.
ID: 2677977 • Letter: A
Question
At the end of the year 2011 the BRK Corporation paid dividends $0.25 per share. The company projects the following annual growth rates in dividends:Year Growth Rate
2012 15%
2013 15%
2014 15%
2015 13%
2016 11%
2017 9%
From year 2018 onward growth in dividends is expected to remain constant at 7% per year. The stock has a beta of 1.0 and the current market price is $55. Currently the yield on 10-year Treasury notes is 5% and the market risk premium is 4%
12. Calculate the present value now (end of the Year 2011) of dividends during the period of high-growth (that is for years 2012 to 2014).
13. Calculate the present value now (end of the Year 2011) of dividends during the period of declining growth (that is for years 2015 to 2017).
14. Calculate the present value now (end of the Year 2011) of dividends during the period of constant growth (that is for years 2018 onwards).
15. Calculate the intrinsic value of the stock now (end of the Year 2011). Are you going to buy this stock? Why?
Explanation / Answer
re =5%+1*4% =9% Dividend for 2012 =$0.25*1.15=0.2875 Dividend for 2013 =$0.25*1.15^2=0.330625 Dividend for 2014 =$0.25*1.15^3 =0.38021875 Dividend for 2015 =$0.25*1.15^3*1.13=0.429647188 Dividend for 2016 =$0.25*1.15^3*1.13*1.11=0.476908378 Dividend for 2017=$0.25*1.15^3*1.13*1.11*1.09=0.519830132 Dividend for 2018=$0.25*1.15^3*1.13*1.11*1.09*1.07 =0.556218241 12. Present value of dividends during the period of high-growth =0.2875/1.09 +0.330625/1.09^2 +0.38021875/1.09^3 = $0.83564 13. present value of dividends during the period of declining growth =0.429647188/1.09^4 +0.476908378/1.09^5 + 0.519830132/1.09^6 =0.924288346 14 present value of dividends during the period of constant growth (0.556218241/(9%-7%))/1.09^6 =16.58273819 15. intrinsic value of the stock =16.58273819+0.924288346+$0.83564 = $18.343 No i will not buy this stock because it is much over valued currently selling at $55
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