Seaside Toys currently earns $2.00 per share and currently pays $1.00 per share in dividends. It is expected to have a constant growth rate of 5 percent per year. The required rate of return is 15 percent. What is the intrinsic value of this stock

Question

Business

Huber

27 July, 23:15

Seaside Toys currently earns $2.00 per share and currently pays $1.00 per share in dividends. It is expected to have a constant growth rate of 5 percent per year. The required rate of return is 15 percent. What is the intrinsic value of this stock

+2

Answers (1)

Know the Answer?

Dominik Murphy · Answer 1

The intrinsic stock value is $10.5

Explanation:

The inherent value of any other assets or a share of which an investor is expected to have. differences between the dividend discount method (DDM) and the current price is used to evaluate intrinsic value.

The known formula for the Gordon Growth version of the DDM which focused on dividends is given below,

The Intrinsic Price of Stock = D1 / (r - g)

Let recall the values,

D1 = The Dividends after one year from the now

r = The Required rate of return

g = The Growth rate of dividends

Then,

The Intrinsic Price of Stock = $1 (1 + 5%) / (15% - 5%)

Intrinsic Price of Stock = $10.5