Question

you have been asked to calculate the fair price for the common stock of JKL, INC. the firm is going through a period of rapid expansion, and it is expected that dividends will grow by 25% per year for the next two years and 15% per year for three more years. After that time. Dividend growth should stabilize at the historic rate of 5%per year. Yesterday the company paid its annual dividend in the amount of $2.50 per share. Based on market conditions, this stock should be priced to yield 15%. What is the fair price for JKL common stock?

You have been asked to calculate the fair price for the commons alculate the fair price for the common stock of JKL, Inc. The firm is going through a period of rapid expansion, and it is expe od of rapid expansion, and it is expected that dividends will grow by 25% per year for the next two years and 157 per years. After that time, dividend growth should stabilize at the historic 70 per year. Yesterday the company paid its annual dividend in the amount of $2.50 per share. Based on market conditions, this stock should be priced to yield 15%. What is the fair price for JKL common stock?

Answer 1

Fair price of stock is equal to the present value of all future dividends

= 2.50*(1.25)/(1.15) + 2.50(1.25)^2/(1.15)^2 + 2.5(1.25)^2(1.15)/(1.15)^3 + 2.5(1.25)^2(1.15)^2/(1.15)^4 + 2.5(1.25)^2(1.15)^3/(1.15)^5 + 2.5(1.25)^2(1.15)^3(1.05)/(1.15)^5(15%-5%)

=$45.55 per share