Kwest Corp just paid its annual dividend of $1.72.
You expect its dividends to grow at a constant rate of 3% into the foreseeable future.
Stocks with similar risk return 12% on their equity.
QUESTIONS:
a. What is the intrinsic value of a share of Kwest Corp stock?
Now suppose that you are a bit unsure of both the dividend growth rate and the cost of equity. Your analysts believe that the slowest rate at which Kwest dividends will grow is 1%, and the fastest rate is 6%. Similarly, you believe that future returns on Kwest could be as low as 9% or as high as 16%.
b. Given these estimates, what is the lowest estimate of the intrinsic value of a share of Kwest stock?
c. Given these estimates, what is the highest estimate of the intrinsic value of a share of Kwest stock?
d. What does this tell you about the importance of your assumptions when using the discounted dividend model to estimate intrinsic value?