Digital Growth Corporation The Digital Growth Corp. Essay

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Digital Growth Corporation The Digital Growth Corp. is seeking to determine its intrinsic value per equity share. The future value as well as the present value must be determined in order to observe the intrinsic value. The intrinsic value of the stock is calculated by obtaining the increase in underlying asset value of the company due to the retention of earnings per share outstanding, which is a function of the market capitalization rate of 15% per year. The earnings are reinvested over the first 5 years and there are no cash dividends distributed to shareholders.

The firm is also expected to grow at 20% per year over the next 5 years. This is to say, earnings per share will grow at a compounded rate...

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FV = 1.20^5. The following year, or year 6, the firm will start distributing dividends to shareholders equivalent to 40% of its earnings. Earnings are growing at 20% per year on a base of 10 and after five years, the earnings per share is $24.88. 40% of this amount is paid out as cash dividends and the new EPS reinvestment rate is 15% per year.
The intrinsic value of the stock after the first five years is equivalent to its earnings per share, the reinvestment rate, less dividends, which is $50.00 per share (estimated). From year six and beyond, the intrinsic share price changes due to the dividend paid to shareholders, and the lower rate of return on new investments.…

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