Assume Stanton Corporation will pay an annual dividend of $3.37 one year from now. Analysts expect this dividend to grow at 17% p.a. thereafter until the third year. After then, growth will level off at 3.6% p.a.. The firm’s equity cost of capital is 10.4% p.a.. What is the intrinsic value of Stanton Corporation? All of these rates are compounded annually. (Round your answer in dollars to 2 decimal places, e.g. put 1204.42 if your answer is 1204.4243.)

To find the intrinsic value of Stanton Corporation, we use the **Dividend Discount Model (DDM)**, which values a stock by the present value of its future dividends. Since there are two growth phases here (high growth for 2 years and then stable growth thereafter), this is a two-stage DDM problem.

### Step 1: Define the key inputs
- First dividend: $ D_1 = 3.37 $
- High-growth rate for the first two years: $ g_1 = 17\% = 0.17 $
- Constant growth rate after the third year: $ g_2 = 3.6\% = 0.036 $
- Equity cost of capital (discount rate): $ r = 10.4\% = 0.104 $

### Step 2: Calculate the dividends for the first three years
- $ D_2 = D_1 \times (1 + g_1) = 3.37 \times (1 + 0.17) = 3.37 \times 1.17 = 3.9429 $
- $ D_3 = D_2 \times (1 + g_1) = 3.9429 \times 1.17 = 4.6142 $

### Step 3: Calculate the terminal value at year 3
After year 3, the dividend grows at the constant rate $ g_2 = 3.6\% $.

The terminal value at the end of year 3 (using the Gordon Growth Model) is given by:
\[
\text{Terminal Value at Year 3} = \frac{D_4}{r - g_2}
\]
where $ D_4 = D_3 \times (1 + g_2) = 4.6142 \times 1.036 = 4.7804 $.

Thus,
\[
\text{Terminal Value at Year 3} = \frac{4.7804}{0.104 - 0.036} = \frac{4.7804}{0.068} = 70.297
\]

### Step 4: Discount the dividends and terminal value to the present
Now, discount each of the future cash flows (dividends and terminal value) back to the present using the formula:
\[
\text{Present Value} = \frac{D_t}{(1 + r)^t}
\]

- Present value of $ D_1 $:
\[
\frac{3.37}{(1 + 0.104)^1} = \frac{3.37}{1.104} = 3.0534
\]
- Present value of $ D_2 $:
\[
\frac{3.9429}{(1 + 0.104)^2} = \frac{3.9429}{1.219} = 3.2344
\]
- Present value of $ D_3 $:
\[
\frac{4.6142}{(1 + 0.104)^3} = \frac{4.6142}{1.346} = 3.4282
\]
- Present value of the terminal value:
\[
\frac{70.297}{(1 + 0.104)^3} = \frac{70.297}{1.346} = 52.241
\]

### Step 5: Calculate the intrinsic value
Finally, sum up the present values of all the dividends and the terminal value:
\[
\text{Intrinsic Value} = 3.0534 + 3.2344 + 3.4282 + 52.241 = 61.957
\]

Thus, the intrinsic value of Stanton Corporation is approximately **$61.96**.

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Would you like further details or have any questions about the solution?

Here are five related questions to expand your understanding:
1. How does the Dividend Discount Model change if the growth rate is constant from the start?
2. How would the intrinsic value change if the cost of capital increases to 12%?
3. Can this model be used for companies that don't pay dividends? Why or why not?
4. What are some limitations of using the two-stage DDM for valuing a company?
5. How do changes in the long-term growth rate affect the terminal value?

**Tip**: The Dividend Discount Model assumes dividends will grow indefinitely. Be cautious when applying it to firms in highly volatile industries or those

Assume Stanton Corporation will pay an annual dividend of $3.37 one year from now. Analysts expect this dividend to grow at 17% p.a. thereafter until the third year. After then, growth will level off at 3.6% p.a. The firm’s equity cost of capital is 10.4% p.a. What is the intrinsic value of Stanton Corporation? All of these rates are compounded annually.

Learn how to calculate the intrinsic value of Stanton Corporation using the Dividend Discount Model (DDM). This step-by-step guide includes calculations of future dividends, present value, and terminal value, with key inputs like a 17% growth rate for 2 years, 3.6% stable growth thereafter, and a 10.4% discount rate. Suitable for college-level finance students.

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