Lawrence Industries' most recent annual dividend was $1.68 per share (d=$1.68) and the firm's required return is 11%. Find the market value of Lawrences' shares when dividends are expected to grow at 10% annually for 3 years, followed by a 7% constant annual growth rate in years 4 to infinity. a. The market value of Lawrence's shares is
Step-1: | Present Value of dividend of Year 1 to Year 3 | |||||||
Year | Dividend | Discount Factor (1.11^-n) | Present Value | Dividend (working) | ||||
1 | $ 1.85 | 0.901 | $ 1.66 | 1.68*(1+.10) | = | $ 1.85 | ||
2 | $ 2.04 | 0.812 | $ 1.65 | 1.85*(1+.10) | = | $ 2.04 | ||
3 | $ 2.24 | 0.731 | $ 1.64 | 2.04*(1+.10) | = | $ 2.24 | ||
Total | $ 4.96 | |||||||
Step-2: | Present value of dividend of 3 Year onwards | |||||||
= | (D3*(1+g)/(ke-g))*(1+Ke)^-3 | Where, | ||||||
= | (2.24*(1+.07)/(.11-.07))*(1.11^-3) | g | = | After 3 year Growth Rate | ||||
= | $ 43.81 | Ke | = | Required return | ||||
D3 | = | Dividend of Year 3 | ||||||
Step-3: | Market Value | = | Step-1 + Step-2 | |||||
= | 4.96 + 43.81 | |||||||
= | $ 48.77 | |||||||
Thus, market value of share is $ 48.77 |
Lawrence Industries' most recent annual dividend was $1.68 per share (d=$1.68) and the firm's required return...
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