Question

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?

Answer 1

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