In: Finance
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?
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 |