A person is considering buying the stock of two home health companies that are similar in all respects except the proportion of earnings paid out as dividends. Both companies are expected to earn $6 per share in the coming year, but Company D (for dividends) is expected to pay out the entire amount as dividends, while Company G (for growth) is expected to pay out only one-third of its earnings, or $2 per share. The companies are equally risky and their required rate of return is 15%. D’s contrast growth rate is zero and G’s is 8.38 percent. What are the intrinsic values of stocks D and G?
The question belongs to Finance and it discusses about calculating the intrinsic values of stocks of two companies given. The solution has the calculations.
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