The new little-known firm is analyzed from the prospect of investments in its shares by two friends. The firm paid dividends last year Php20 per share. Tomas and Barabas examined the prices of similar...

The new little-known firm is analyzed from the prospect of investments in its shares by two friends. The firm paid dividends last year Php20 per share. Tomas and Barabas examined the prices of similar stocks in the market and found that they provide 12 % expected return.

The forecast of Tomas is as follows: 4 % of growth in dividends indefinitely. The forecast of Barabas is as follows: 10% of growth in dividends for the next two years, after which the growth rate is expected to decline to 3 % for the indefinite period.

1. What is the intrinsic value of the stock of the firm according to Tomas forecast?


2. What is the intrinsic value of the stock of the firm according to Barabas forecast?


3. If the stocks of this firm currently are selling in the market for Php40 per share, what would be the decisions of Tomas and Barabas, based on their forecasting: is this stock attractive investment? Explain.