Yippie is a recent startup and is currently not paying any dividends. The earnings in 2006 are expected to be $4 a share and analysts predict that Yippie’s earnings will grow at an annual rate of 30% for the next three years (until 2009).
The return of new investments of Yippie is expected to be 10% indefinitely starting in 2010. Yippie is expected to start paying annual dividends in 2009 and these dividends will be equal to 60% of the earnings. Assume that all earnings accrue at the end of the year and that the dividends are also paid once at the end of the year. Yippie has a beta of 1.5, the market return is 7%, and the risk-free rate is 2%.
a. What is the intrinsic value of Yippie’s stock in April 2006 using the dividend discount model?