MercedesF1 currently has a dividend payout ratio of 100% which is expected to stay constant in perpetuity. MercedesF1's next year's dividend per share is expected to be equal to $12.20 and their cost of equity is equal to 12.00%. What is the intrinsic value of one share of stock equal to?Do not enter the $ sign in your answer.If you solve this problem with algebra, round any intermediate calculations to 6 decimal places.In all cases round your final answer to two decimal places, e.g. $8.723456, write 8.72
Question
MercedesF1 currently has a dividend payout ratio of 100% which is expected to stay constant in perpetuity. MercedesF1's next year's dividend per share is expected to be equal to sign in your answer.If you solve this problem with algebra, round any intermediate calculations to 6 decimal places.In all cases round your final answer to two decimal places, e.g. $8.723456, write 8.72
Solution
To calculate the intrinsic value of one share of stock, we can use the Gordon Growth Model, which is a version of the Dividend Discount Model (DDM). The formula is:
P = D / (r - g)
Where: P = intrinsic value of the stock D = expected dividend per share one year from now r = required rate of return g = growth rate of dividends
Since MercedesF1 has a dividend payout ratio of 100%, it means that all of its earnings are paid out as dividends and there are no retained earnings for growth. Therefore, the growth rate (g) is 0%.
Substituting the given values into the Gordon Growth Model, we get:
P = 12.20 / 0.12 P = $101.67
So, the intrinsic value of one share of MercedesF1 stock is approximately $101.67.
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