Gentleman Gym just paid its annual dividend of $4 per share, and it is widely expected that the dividend will increase by 2% per year indefinitely. a. What price should the stock sell at if the discount rate is 18%. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Stock price $ b. What price should the stock sell at if the discount rate is 10%. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

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7 April, 08:29

Gentleman Gym just paid its annual dividend of $4 per share, and it is widely expected that the dividend will increase by 2% per year indefinitely. a. What price should the stock sell at if the discount rate is 18%. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Stock price $ b. What price should the stock sell at if the discount rate is 10%. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

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Jonathan Bentley · Answer 1

a. The intrinsic value is 25.5.

b. The intrinsic value is 51.

Explanation:

This is an example of dividen discounted model (DDM) with indefinite growth. The DDM is stated as below:

Stock intrinsic value = Next year dividend / (Discount rate - Growth rate)

a. If the discount rate is 18%, the stock value = 4 x (1 + 2%) / (18% - 2%) = 25.5.

b. If the discount rate is 10%, the stock value = 4 x (1 + 2%) / (10% - 2%) = 51.