Calculate the intrinsic value of ABC Corp using a three-stage dividend model assuming
- The current dividend D(0) is $5 per share and the current payout ratio is 25%, EPS (0) = $25
-starting next year the company will increase the payout ratio by 10% points per year (ex. from
25% to 35% to 45% to 55%) for the next 3 years.
- The earnings per share is expected to grow 25% per year for the next 3 years
- The earnings per share is expected to grow 15% for years 4-6 (the payout ratio will not change
from year 3.
-The earnings per share in year 7 and beyond is expected to grow at a constant rate of 4%
- The required rate of return is 10%
Recall that DPS = EPS X POR
HINT – set this up in excel – you have 7 years of dividends to extrapolate
Horizon Value P(6) = D(7) / (r – g); constant growth is in year 7 and beyond