What is the expected intrinsic price of each stock in year 5 for each company Stephanie wants to invest in. Assuming that: All stocks are fairly priced such that the intrinsic and market values are equal and Dividends are paid at the beginning of the year
Stephanie will require a return of at least 9% on her stock investments and would have to pay 25% taxes on any interest income. Dividends will be tax-free. Stephanie wants to invest stock in the following companies
1. Pan-Elixir Ltd. is a pharmaceutical company. Its stock is fairly priced. Last year (t = 0), it paid a dividend of $2.50 per share to its shareholders. The company management hasestimated that it will be able to maintain a constant growth
2. Rebound Tourism Inc. is a travel planning establishment. Its shares sold for an average price of $40 per share last year (t = 0) and the management estimates to maintain a constant growth rate in dividends. Last year, it paid a dividend of $0.50 per share to its shareholders.
3. Cheers Inc. is a beverage producer. It pays a dividend of $1 per share to its shareholders, which is likely to remain constant over an indefinite time period.
4. Think-Local Inc. paid $0.75 per share as dividend last year (t = 0). The company expects that it will take next 2 years (till t = 2) to recover from the pandemic’s effects, during which time, its dividend will grow at a rate of 1.5% per annum. From year 3 onwards, the dividend growth rate is expected to settle at 2% per year indefinitely.
What is the expected intrinsic price of each stock in year 5 for each company Stephanie wants to invest in. Assuming that: All stocks are fairly priced such that the intrinsic and market values are equal and
Dividends are paid at the beginning of the year
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Can you explain how you got the 7% growth rate for #2 Rebound Tourism Inc.
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