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3. (10 points) John Smith has been directed to determine the value of Widget's stock. John believes that Widgets dividends will grow at 10% per
3. (10 points) John Smith has been directed to determine the value of Widget's stock. John believes that Widgets dividends will grow at 10% per year for the first three years and at 2% thereafter. Widget paid a dividend of $1.50 in the most recent year (DO). In addition, the risk-free rate is 3% and the expected market premium is 5%. John has estimated Widget's beta to be 0.8. a. (1 points) Calculate the required rate of return k for Widget (cost of equity). b. To estimate the intrinsic value of Widget by using the two-stage dividend discount model: i) (3 points) What are the dividends in Year 1, Year 2, and Year 3? ii) (3 points) What is the intrinsic value in Year 3 (when it reaches a constant growth rate)? iii) (3 points) What is the current intrinsic value (in Year 0)
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