Question 4:
Consider the value of company ALPHAFARM earning $10.00 in earnings
per share (EPS) and currently paying $5 in dividends per share
(DPS) per annum with earnings and dividends both expected to grow
indefinitely at 3% per annum and discounted at 12% (i.e. a
risk-free rate of 5% plus an equity risk premium of 7%).
Calculate the value of APLHAFARM shares based on a dividend discount model (DDM) in perpetuity assuming constant growth rates indefinitely. (value to the nearest whole number)
current dividend (D0)= 5
Growth rate = 3% or 0.03
required Return (ke)= 12% or 0.12
Price formula as per Dividend discount model in perpetuity =
D0*(1+g)/(ke - g)
5*(1+0.03)/(0.12-0.03)
5.15 / 0.09
57.22222222
So, stock price is $57
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Question 4: Consider the value of company ALPHAFARM earning $10.00 in earnings per share (EPS) and...
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