An investor purchased 5,000 shares of ABC Corporation’s common stock at $45 per share. The stock pays an annual dividend of $1.75 per share. During the next three years the dividend is expected to growth at an abnormal rate of 8%. Thereafter, the dividend is expected to grow at 5% per year forever.
1. If the investor requires 12% to invest in the common stock of companies with similar risk characteristics as ABC Corporation, what is the intrinsic value of this stock?
2. Explain/discuss the concept of intrinsic value.
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