Equities investment problem.
Investor A wants to invest in Company XYZ. Company XYZ’s shares are trading at R220 per share. The company is expected to pay a dividend of $15 per share at the end of the year. Thereafter, dividends are expected to grow by 10% per year for the next two (2) years (i.e. the short term), and then grow by 5% into perpetuity. The cost of equity for the company is 12%.
a) Calculate the terminal value
b) Determine the intrinsic value of Company XYZ’s share.