Ask Question
BusinessBusiness
17 June, 20:29

Estimate the intrinsic value of Carma Corp. using the dividend discount model under each of the following separate assumptions:

a. The dividend is expected to last into perpetuity.

b. The dividend will be $0.95 next year and then will grow at a rate of 5% per year.

c. The dividend will be $0.85 for the next four years and then will grow at a rate of 5%.

+1
Answers (1)
  1. 17 June, 22:05
    0
    8. Carma Corp. currently pays a dividend of $0.85 per share. In addition, Carma's market beta is 2.2 when the risk free rate is 5% and the expected market premium is 7%. Estimate the intrinsic value of Carma Corp. using the dividend discount model under each of the following separate assumptions:

    a. The dividend is expected to last into perpetuity.

    b. The dividend will be $0.95 next year and then will grow at a rate of 5% per year.

    c. The dividend will be $0.85 for the next four years and then will grow at a rate of 5%.

    Explanation:

    a) The steps to solving this question involves

    1. The dividend discount model which is given by the formula: P = d / (r-g) where P = price of a share, d = dividend, r = rate of return, g = growth rate.

    2. Rate of return is not given in the question and can be derived using the Capital Asset Pricing Model (CAPM). Expected Return = Rf + b (Rm - Rf) where rf = risk free rate, rm = market rate and b = beta

    Therefore r = 5+2.2 (7-5) = 9.4%

    3. Substituting 9.4% for r in the dividend discount model: P = 0.85 / (0.094-0) = $9.04

    b) Value of Carma with 1 year holding period is given by the dividend discount formula: (D1 (1+g) / (1+r)) + P1 / (1+r)

    where P1 = price of a share in 1 years time, d = dividend in 1 years time, r = rate of return, g = growth rate.

    Therefore P1 = Price of share in 1 year time which is determined by a summation of Price of the share now (P0 solved in 'a' above without any holding period) and the current year dividend (D0). Which is $9.4 + 0.85 = $10.25.

    P0 with 1 year holding period = (0.95 (1+0.05) / (1+.094)) + (10.25 / (1+.094) = $10.28

    c) Where the dividend remains constant over a horizon of 4 years the price every year is determined by the addition of the constant dividend. Hence in years 1-4, P1 = 9.04 + P2 = (9.04+0.85) + P3 = (9.04+0.85+0.85) + P4 = (9.04+0.85+0.85+0.85) + P5 ahead at a growth of 5% = (0.85 (1+0.05) / (1+.094) = $42.08
Know the Answer?
Not Sure About the Answer?
Find an answer to your question ✅ “Estimate the intrinsic value of Carma Corp. using the dividend discount model under each of the following separate assumptions: a. The ...” in 📘 Business if you're in doubt about the correctness of the answers or there's no answer, then try to use the smart search and find answers to the similar questions.
Search for Other Answers
You Might be Interested in
Javier, a homeowner, files a lawsuit against dean, his construction contractor. they meet with their attorneys to try to resolve their dispute before going to trial. this proceeding is known as
Answers (1)
Quantity along the import demand curve equals: A. the quantity demanded by domestic consumers minus the quantity in the no-trade equilibrium. B. the quantity demanded minus the quantity supplied by domestic producers at every price. C.
Answers (1)
The Stationery Company purchased merchandise on account from a supplier for $9,900, terms 1/10, n/30. The Stationery Company returned merchandise with an invoice amount of $1,300 and received full credit. a.
Answers (2)
On July 1, 2020, Cheyenne Corp. pays $21,900 to Kalter Insurance Co. for a 3-year insurance contract. Both companies have fiscal years ending December 31. For Cheyenne Corp.
Answers (1)
A Super Happy Fun Ball is dropped from a height of 10 feet and rebounds 13/14 of the distance from which it fell. How many times will it bounce before its rebound is less than 1 foot? It will bounce times before its rebound is less than 1 foot.
Answers (1)
New Questions in Business
A qualification that might ordinarily be argued as being a basis for discrimination, but a company can show is job related and necessary is called a a. real and necessary distinction. b. quasi-discriminatory factor. c.
Answers (1)
Rasheed can afford a monthly car payment of $600 for 5 years at an annual interest rate of 4 percent. Which of the following is closest to the amount he will be able to borrow for a new car? Remember, loans are END of period.
Answers (1)
Kimbeth Manufacturing uses process costing to control costs in the manufacture of Dust Sensors for the mining industry. The following information pertains to operations for November.
Answers (1)
If the consumer price index was 170 in one year and 180 in the next year, then the rate of inflation is approximately:
Answers (2)
Deitz Corporation is projecting a cash balance of $30,600 in its December 31, 2019, balance sheet. Deitz's schedule of expected collections from customers for the first quarter of 2020 shows total collections of $188,700.
Answers (1)
Home » Business » Estimate the intrinsic value of Carma Corp. using the dividend discount model under each of the following separate assumptions: a. The dividend is expected to last into perpetuity. b. The dividend will be $0.
Sign Up Forgot Password?