Sensitivity of Intrinsic Value Estimates

Kellogg Company is expected to pay $2.00 in annual dividends to its common shareholders in the future. Our best estimate of the expected cost of equity capital is 5.0% and the expected growth rate in dividends is 2%.

Required

a.Compute Kelloggs intrinsic value. Recompute intrinsic value to reflect increases and decreases of 0.5% in both (i) cost of equity capital and (ii) growth rate.

b.Given the intrinsic values computed in part a, what level of confidence do we have in the intrinsic value estimate from the dividend discount model?