1 Puyau Enterprises recently paid a dividend D0 of 300 It ex

1. Puyau Enterprises recently paid a dividend, D₀, of $3.00. It expects to have nonconstant growth of 15 percent for 2 years followed by a constant rate of 6 percent thereafter. The firm’s required return is 8 percent. What is the stock’s intrinsic value today?

I know the answer is $186.88 but I don\'t get how to solve it. May I know step-by-step?

2. McClelland Enterprises invests a lot of money in R&D, and as a result it retains and reinvests all of its earnings instead of paying dividends. A pension fund manager is interested in purchasing McClelland’s stock and has estimated its free cash flows for the next 3 years as follows: $4 million, $7 million, and $12 million. After the 3rd year, FCF is projected to grow at a constant 9 percent. McClelland’s WACC is 15 percent, its debt and preferred stock total $40 million, and it has 2 million shares of common stock outstanding. What is the value of McClelland’s stock price?

Solution

Answer to Question 1:

Recent Dividend, D0 = $3.00

Growth rate for next 2 years is 15%, followed by a constant growth rate (g) of 6%

D1 = $3.0000 * 1.15 = $3.4500
D2 = $3.4500 * 1.15 = $3.9675
D3 = $3.9675 * 1.06 = $4.2056

Required return, r = 8%

P2 = D3 / (r - g)
P2 = $4.2056 / (0.08 - 0.06)
P2 = $210.2800

P0 = $3.4500/1.08 + $3.9675/1.08^2 + $210.2800/1.08^2
P0 = $186.88