24

Use the variable-growth model to predict the intrinsic value of the Rhyhorn Company common stock. Assume that dividends will grow at a variable rate for the next three years

(2019,

2020,

and

2021).

After that, the annual rate of growth in dividends is expected to be

6%

and stay there for the foreseeable future. Starting with the latest

(2018)

annual dividend of

$1.88

per share, Rhyhorn's earnings and dividends are estimated to grow by

16%

in

2019,

by

14%

in

2020,

and by

11%

in

2021021

before dropping to a

6%

rate. Given the risk profile of the firm, assume a minimum required rate of return of at least

11%.

a. Calculate the projected annual dividends over the years

2019,

2020,

and

2021.

b. Determine the present value of dividends during the initial variable-growth period.

c. What do you believe the price of Rhyhorn stock will be at the end of the initial growth period

(2021)?

d. Having determined the expected future price of Rhyhorn stock in part

c,

discount the price of the stock back to its present value.

e. Determine the total intrinsic value of Rhyhorn stock based on your previous calculations.