2. ABC Corp., which is a small cap company with a stock beta of 1.2, is expected to experience a transitory turnaround period during which its dividends are expected to be cut from its current level of $3.0 into half next year, and then to grow at 40% and 20%, respectively, in the following two years. Afterwards, its dividends will experience sustainable growth indefinitely at an annual rate that reflects the 55% dividend payout ratio and an estimated ROE of 24%. The risk-free rate and the market risk premium are 2% and 13%, respectively.

(a) Compute the intrinsic value of Lee Corp's stock today. If the stock price for Lee Corp. is $28.0 today, what is your recommendation on this stock according to the intrinsic value analysis? Why?

(b) Compute the value of income component and then the value of growth component (NPVGO) of Lee Corp's stock price today. Assume that the dividend payout ratio remains unchanged over time!

Answer rating: 100% (QA)

a Intrinsic Value of ABC Corps Stock To calculate the intrinsic value of ABC Corps stock we need to use the dividend discount model DDM We will use th... View the full answer