Question

Using a BA II plus, rework Table 7.4 for horizon years 1, 2, 3, and 10, assuming that investors expect the dividend and the stock price to increase at only 6% a year and that each investor requires the same 12% expected return. Current dividends are $5.40.

What value would Dritter place on the stock and what about Zehnte who has a 10-year horizon?

PV Horizon (years) PV (Terminal Price) Value per Share (Dividends) 1 10

Answer 1

Horizon	PV (Dividends)	PV (Terminal Price)	Value per Share
1	5.11	90.29	95.40
2	9.95	85.45	95.40
3	14.53	80.87	95.40
10	40.39	55.01	95.40

Value per Share = D0(1+g)/(r-g)

where D0 is the current Dividend

G is the Growth Rate

R is the expected return

Value of the Share = 5.4(1+6%)/(12%-6%) =$95.40

PV of dividend = 5.4(1+6%)/(1+12%) = $5.11

PV of the Terminal Value = $95.40-$5.11 = $90.29