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IBM has generated annual dividend growth of 15.1% over the past 3 years. IBM's most recent annual dividend is $2.90. Assume IBM will continue to increase dividends at 15.1% for the next 5 years before reducing its dividend growth to 6% for the long term. Also assume that the required return for IBM stock is 9.5%. It is currently trading for $179.90.
Question 1
Use the two-stage dividend discount model to determine the current intrinsic value for IBM given these assumptions. Is the stock overvalued or undervalued? Briefly explain the possible reasons for your response.
Question 2
What long term dividend growth rate will provide an intrinsic value similar to the current market price? (Leave all other assumptions in place.)
Question 3
Reset the long term dividend growth rate to 6%. What required rate of return would provide an intrinsic value similar to the current market price? (Leave all other assumptions in place.)
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