a) Suppose the company decided to payout 90% of its earnings as dividends, what would be the fundamental value of the stock today? (t=0)
Homework Answers
a) The fundamental value of stock today is :
The cost of equity is :
Re = Rf + beta * (Rm - Rf)
= 5 + 1.3* 5
= 11.5%
E1 = 0
E2 = $10
E3= $10.8
So, the dividends paid is :
D1 = 0
D2= $9
D3= $9.72 ($9 *1.08)
P2 = D3/ Re - g
= $9.72 / 0.115 - 0.08
= $277.7143
So, the current value of stock is : ($9 + $277.7143)/1.115^2
= $230.62 ( rounded off to two decimal places)
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