Calculate the intrinsic value of ABC Corp using a three-stage dividend model assuming:
- The current dividend D(0) is $5 per share and the current payout ratio POR(0) is 25%
-starting next year, the company will increase the payout ratio by 10% points per year (ex. from
25% to 35%) for the next 3 years.
- The earnings per share is expected to grow 25% per year for the next 3 years
- The earnings per share is expected to grow 15% for years 4-6 (the payout ratio will not change
from year 3.
-The dividend per share in year 7 and beyond is expected to grow at a constant rate of 4%
- The required rate of return is 10%
Recall that DPS = EPS X POR