Question

In: Finance

Dvorak Enterprises is expected to pay a stable dividend of $5 per share per year for...

Dvorak Enterprises is expected to pay a stable dividend of $5 per share per year for the next 10 years. After that, investors anticipate that the dividends will grow at a constant rate of 3.1 percent per year indefinitely. If the required rate of return on this stock is 10 percent, what is the fair market value of a share of Dvorak?

Solutions

Expert Solution

Calculation of stock's current price:
Year Particulars Amount PVF @10% Present value
1 Dividend                       5.00 0.909                       4.55
2 Dividend                       5.00 0.826                       4.13
3 Dividend                       5.00 0.751                       3.76
4 Dividend                       5.00 0.683                       3.42
5 Dividend                       5.00 0.621                       3.10
6 Dividend                       5.00 0.564                       2.82
7 Dividend                       5.00 0.513                       2.57
8 Dividend                       5.00 0.467                       2.33
9 Dividend                       5.00 0.424                       2.12
10 Dividend                       5.00 0.386                       1.93
10 Terminal value                     74.71 0.386                     28.84
Total                     59.56
So value of stock is $59.56
Working:
Calculation of dividend:
Terminal value= Dividend(1+growth)/(return-growth)
                              =5(1+0.031)/(0.10-0.031)
                             =74.71

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