Question

A stock you are evaluating just paid an annual dividend of $2.30. Dividends have grown at a constant rate of 1.6 percent over the last 15 years and you expect this to continue. a. If the required rate of return on the stock is 12.4 percent, what is its fair present value?b. If the required rate of return on the stock is 15.4 percent, what should the fair value be four years from today?

Answer 1

Current Dividend	2.3000
Rate of return	12.40%
Growth Rate	1.60%
Horizon value	=Current Dividend*(1+Growth rate)/(Rate of return-Growth Rate)
	'2.3*(1+0.016)/(0.124-0.016)
	21.637

Year	Dividend	Dividend
1	2.3*101.6%	2.3368
2	2.336*1.016	2.3742
3	2.688*1.016	2.4122
4	3.010*1.016	2.4508
Dividend t4	2.4508
Rate of return	15.40%
Growth Rate	1.60%
Fair value at T4	=Current Dividend*(1+Growth rate)/(Rate of return-Growth Rate)
	'2.4507*(1+0.016)/(0.154-0.016)
	18.043