. Shellbridge Corporation common stock has a par value of $25 and recently paid a dividend of $3.16 per share. The firm's dividends have grown from $2.00 to $3.16 over the past 10 years, which also reflects the expected growth in dividends for the indefinite future. The stock is selling for $40 and you think a reasonable required rate of return is 12%. What is the stock's intrinsic value?

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TomShelby TomShelby · Answer 1 · 2019-11-06T23:24:24+01:00

Answer:

Intrinsic value: $ 45.19290274

The stock is undervalued as is selling for less.

Explanation:

We use the gordon model to solve for the intrinsic value of the share.

[tex]\frac{divends_1}{return-growth} = Intrinsic \: Value[/tex]

we must solve for the grow rate like it was an interest rate:

grow rate:

[tex]2.00 \times (1+g)^{10} = 3.16\\\sqrt[10]{\frac{3.16}{2.00}} -1 = g[/tex]

g = 0.046804808

dividends one year from now:

3.16 x (1 + 0.046804808) = 3.307903193

Now we calculate the instrinsic value:

[tex]\frac{3.307903193}{0.10 - 0.046804808} = Intrinsic \: Value[/tex]

Value: $ 45.19290274

The stock is undervalued as is selling for less.