Question
The current (t=0) dividend of a corportation named ABC is $1.00 per share. The dividends is expected to grow at 20% from t=0 to t=1,
The current (t=0) dividend of a corportation named ABC is $1.00 per share. The dividends is expected to grow at 20% from t=0 to t=1, and t=1 to t=2 (today is t=0). The dividends are expected to grow at 5% indefinitely, starting at year 2 (t=2), Assume the required rate of return for the equity of ABC is 10%.
1. Calcuate the intrinsic value today (t=0) of a share of ABC.
2. Calcuate the intrinsic value of a share of ABC next year (i.e., at t=1).
3. Suppose you buy the stock at the price you calculated in part 1. Calculate the expected holding period return from t=0 to t=1 assuming that next year's (i.e., t = 1) price is equal to its intrinsic value.
4. If your answer to part 3 is equal to 10%. Explain
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