Question

. Calculate the fair value based on the following information:

       Current dividend = $1.67

       Normal growth rate = 2.5%

       Super growth rate = 12%

       Duration of the super growth rate = 15 years

       Required return 8.5%

Answer 1

- Current dividend(D0) = $1.67

Super Growth rate of dividend for next 15 years(g) = 12%

Normal growth rate therafter(g1) = 2.5%

Required return(ke) = 8.5%

- Calculating the Present Value today of Dividends in Super growth period using PV of growth annuity formula:-

where, D1 = D0(1+g) = $1.67*(1+0.12) = $1.8704

n = no of years = 15

Present value = $17.8934

So, the Present Value today of Dividends in Super growth period is $17.8934

- Horizon date is the date when the Growth rate becomes Constant or Normal . It occurs at the end of year 15.

Calculating Horizon Value:-

HV = $156.1563

So, Value of stock at year end 15 is $156.1563

Now, Calculating the Present Value today of Horizon Value:-

Present Value = HV/(1+ke)^15

Present Value = $156.1563/(1+0.085)^15

Present Value = $156.1563/3.39974287882

Present Value = $45.9318

Total Present value or fair Value of Stock today = $45.9318 + $17.8934

= $63.83

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