IBM has paid a dividend for many years and currently has a dividend yield around 5%. You would like to calculate the intrinsic value of the stock and decide to use the dividend growth model. IBM currently pays a dividend of $6.60 (this is the current dividend, Do).

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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IBM has paid a dividend for many years and currently has a dividend yield around 5%. You would like to
calculate the intrinsic value of the stock and decide to use the dividend growth model. IBM currently pays
a dividend of $6.60 (this is the current dividend, Do).
Transcribed Image Text:IBM has paid a dividend for many years and currently has a dividend yield around 5%. You would like to calculate the intrinsic value of the stock and decide to use the dividend growth model. IBM currently pays a dividend of $6.60 (this is the current dividend, Do).
Q2. If you study historical prices in Yahoo finance, you can see that IBM's dividend has roughly doubled
in the past 10 years. Thus, a simple rule-of-72 calculation shows the dividend growth rate has been about
7%, on average, for the past 10 years. Similarly, analysts' forward 5-year growth forecast is about 7% per
year. So, you make the assumption that IBM's dividend will have constant growth of 7%. Calculate the
intrinsic value per share.
Q3: You revise your estimate of growth because you realize that IBM's dividend has grown by only about
3% per year over the past 5 years, despite the faster earlier growth. So, you decide to use 3% as a constant
growth rate. Calculate the intrinsic value per share.
Q4: You revise your estimate of growth again because you take account of analyst growth estimates of
7% and apply this rate for the next 3 years, then after that you apply a constant rate of 3%.
Transcribed Image Text:Q2. If you study historical prices in Yahoo finance, you can see that IBM's dividend has roughly doubled in the past 10 years. Thus, a simple rule-of-72 calculation shows the dividend growth rate has been about 7%, on average, for the past 10 years. Similarly, analysts' forward 5-year growth forecast is about 7% per year. So, you make the assumption that IBM's dividend will have constant growth of 7%. Calculate the intrinsic value per share. Q3: You revise your estimate of growth because you realize that IBM's dividend has grown by only about 3% per year over the past 5 years, despite the faster earlier growth. So, you decide to use 3% as a constant growth rate. Calculate the intrinsic value per share. Q4: You revise your estimate of growth again because you take account of analyst growth estimates of 7% and apply this rate for the next 3 years, then after that you apply a constant rate of 3%.
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