Growth Rate Estimation and Constant Growth Model

Consider the price of a common stock that is expected to pay dividend in the future, dividends are

expected to grow at 10% and the investors required rate of return is 15%. The earning per share (EPS) is

expected to be $3 and the ROE is expected to be 20% at the end of next year.

a. Does the growth enhance the value of stock or hurt value of stock?

b. Compute dividend payout ratio and the value of dividend at the end of next year.

c. Estimate the intrinsic value of stock.

d. Can you compute the intrinsic value of the stock if growth rate increases to 20% by using dividend

model? If not, which model can you switch to ?

e. Compute the present value of growth opportunity (PVGO)