Question

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You are valuing a firm that does not plan to pay dividends for the next 10...

You are valuing a firm that does not plan to pay dividends for the next 10 years. Starting year 11, the company will pay a constant dividend of $1 per share. The discount rate for the stock of the firm is 12%. What is the fair value of the firm?

$12.98

$5.71

$8.33

$2.68

Solutions

Expert Solution

Dividend in Year 11 = $1.00

So,

Using DDM Model,

Stock Price at the end of Year 10 = 1/0.12

Stock Price at the end of Year 10 = $8.33

Stock Price today = 8.33/(1.12)10

Stock Price today = $2.68

jeff jeffy answered 3 years ago
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