The new little known firm is analyzed from the prospect of investments in its shares by two friends. The firm paid dividends last year 3 EURO per share. Tomas and Arnas examined the prices of similar stocks in the market and found that they provide 12 % expected return. The forecast of Tomas is as follows: 4 % of growth in dividends indefinitely. The forecast of Arnas is as follows: 10% of growth in dividends for the next two years, after which the growth rate is expected to decline to 3 % for the indefinite period.

a) What is the intrinsic value of the stock of the firm according to Tomas forecast?

b) What is the intrinsic value of the stock of the firm according to Arnas forecast?

c) If the stocks of this firm currently are selling in the market for 40 EURO per share, what would be the decisions of Tomas and Arnas, based on their forecasting: is this stock attractive investment? Explain.

Answer rating: 100% (QA)

a What is the intrinsic value of stock as per Thomas forecast Dividend Eur 3 ... View the full answer