SOLUTION: Hi, Can you please help me solve the following problem question? The dividend payments for a listed company are expected to grow at 5% per year. The current dividend is $3 per

Question 994687: Hi,
Can you please help me solve the following problem question?
The dividend payments for a listed company are expected to grow at 5% per year. The current dividend is $3 per share. Suppose the investors� required rate of return is 10% per annum.
(a)Calculate the intrinsic price of the share.
(b)If the market price is $60 per share, would you buy shares in the company? Explain your answer.
Answer by rothauserc(4718) (Show Source): You can put this solution on YOUR website!
intrinsic share price = Expected dividends one year from the present / ( Required rate of return - Annual growth rate in dividends)
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a) intrinsic share price = 3 / (.10 - .05) = $60
b) no - the stock is at its intrinsic value of $60 which leaves no upside. You want a stock to be higher than its intrinsic value.

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