Martin's Inc. is expected to pay annual dividends of $2.50 a share for the next three years. After that, dividends are expected to increase by 3% annually. What is the current value of this stock to you if you require a 9% rate of return on this investment?

The stock current intrinsic value is: $39,46

Explanation:

We solve using the gordon model for dividend growth to valuate the price of the stock:

d0 = 2.50

d1 = 2.50 x 1.03 = 2.575

Value: 42,91666666666667‬

This value is three years therefore, we need to discount:

Maturity  $42.9167

time  3.00

rate  0.09000

33.1395

We also have to calcualtethe present value of the first, second and third year dividends

discount rate0.09

#Cashflow  Discounted

12.5              2.29

22.5              2.1

32.5              1.93

PV            6.32

We ad this to the PV of the infinite future dividends growing at 3%

6.32 + 33.1395 = 39,4595‬

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Explanation: