The following data pertain to a company that can be appropriately valued using the Gordon growth model. The dividend is expected to grow indefinitely at the existing sustainable growth rate.
| EPS growth rate (three-year average) | 7.50% |
| Current dividend per share | $3.00 |
| Return on equity | 15% |
| Dividend payout ratio | 45% |
| Investors' required rate of return | 16% |
The stock's intrinsic value is closest to:
V0 = D0 (1 + g)/(r - g), where
Sustainable growth rate = g = b × ROE; b = (1 - Payout ratio)
g = (1 - 0.45) × 15% = 8.25%;
V0 = ($3 × 1.0825) + (0.16 - 0.0825) = $41.90