ABC Inc. has paid $4.5 dividends per share last year. What is your value estimate for...
ABC Inc. has paid $4.5 dividends per share last year. What is your value estimate for its share price, if investors required rate of return is 12% and the dividends are expected to grow by 10% for the next two years and after that infinitely at a 4% rate
Homework Answers
Price of Stock = PV of CFs from it.
Div Calculation:
| Year | CF | Formula | Calculation |
| 1 | $ 4.95 | D0(1+g) | 4.5(1.1) |
| 2 | $ 5.45 | D1(1+g) | 4.95(1.1) |
| 3 | $ 5.66 | D2(1+g) | 5.45(1.04) |
P2 = D3 / [ Ke - g ]
= $ 5.66 / [ 12% - 4% ]
= $ 5.66 / 8%
= $ 70.79
Price of Stock Today:
| Year | CF | PVF @12% | Disc CF |
| 1 | $ 4.95 | 0.8929 | $ 4.42 |
| 2 | $ 5.45 | 0.7972 | $ 4.34 |
| 2 | $ 70.79 | 0.7972 | $ 56.43 |
| Price of Stcok Today | $ 65.19 | ||
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