9. Johnsey Systems has robust earnings and has undertaken plan to increase divid

Question

9. Johnsey Systems has robust earnings and has undertaken plan to increase dividends to common shareholders The company most recently paid a dividend of $1.50 per share and plans to increase the annual ordinary dividend according to the schedule: Year Dividend Growth Rate 10% 9% 8% 7% 2 4 After the fourth year, the company will increase the dividend at a constant rate of 5% per year. If the company's required rate of return is 11%, what is the intrinsic value per share of common stock? a. $18.86 b. $24.70 c. $29.69 d. $36.45

Explanation / Answer

Intrinsic value per share of common stock is the Present value of dividends,discounted at the reqd. rate of return of 11 % Year Dividend amt. PV F at 11% PV at 11% 1 1.50*1.1= 1.65 0.90090 1.486486 2 1.65*1.09= 1.7985 0.81162 1.459703 3 1.7985*1.08= 1.94238 0.73119 1.420252 4 1.94238*1.07= 2.0783466 0.65873 1.369071 4 (2.0783466*1.05)/(0.11-0.05)= 36.371066 0.65873 23.95875 Sum 29.69426 So, the intrinsic value of a share of Johnsey Systems stock = $ 29.69 ANSWER: c. $ 29.69

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