Question

Need some help with this, thank you!

A stock you are evaluating just paid an annual dividend of $3.40. Dividends have grown at a constant rate of 2.1 percent over the last 15 years and you expect this to continue. a. If the required rate of return on the stock is 13.5 percent, what is its fair present value? b. If the required rate of return on the stock is 16.5 percent, what should the fair value be four years from today? (For all requirements, do not round intermediate calculations. Round your answers to 2 decimal places. (e.g., 32.16)) a. Fair present value b. Expected fair value

Answer 1

Fair Present Value = D1/(Re-g)

where,

D1= Estimated Dividend for next period = 3.40*1.021 = 3.4714

Re = 0.135

g = 0.021

.

Part-a)

Therefore, fair present value of the stock = 3.4714/(0.135-0.021)

= 3.4714/0.114

= $30.45

.

.

.

Part-b)

D1 = Estimated Dividend after 5 years from now = 3.40*(1.021^5)

= 3.40*1.1095

=3.7723

Re = 0.165

g = 0.021

.

.

Expected fair value = 3.7723/(0.165-0.021)

= 3.7723/0.144

= $26.20