Question

(1) You are evaluating shares in Chevron (CVX). They expect to pay an annual dividend of $8.00 per share next year and expect to increase that by 4% every year. If you use a discount rate of 10%, what is the value of the shares?

I got 104, but it's wrong

(2) You are evaluating shares in Ford Motor (F). They expect to pay an annual dividend of $10.50 per share next year and expect to increase that by 2% every year. If you use a discount rate of 10%, what is the value of the shares?

I got 133.86, but that was wrong

(3) You are evaluating shares in Lyft (LYFT). They currently pay an annual dividend of $10.00 per share this year but expect to increase this payout by 10% next year and the following year. Then, as the company matures, it expects that dividends will only grow by 5% per year thereafter. If you use of discount rate of 20%, what is the value of the shares?

I got 61.65, but wrong

(4) You are evaluating shares in Schlumberger (SLB). They currently pay an annual dividend of $5.50 per share this year but expect to increase this payout by 5% next year and the two following years. Then, as the company matures, it expects that dividends will grow by 2% per year thereafter. If you use of discount rate of 12%, what is the value of the shares?

I got 53.03, but wrong

Any help with these problems?

Answer 1

1)

Value of shares = D1 / required rate - growth rate

Value of shares = 8 / 0.1 - 0.04

Value of shares = 8 / 0.06

Value of shares = $133.33

2)

Value of shares = D1 / required rate - growth rate

Value of shares = 10.5 / 0.1 - 0.02

Value of shares = 10.5 / 0.08

Value of shares = $131.25

3)

year 1 dividend = 10 (1 + 10%) = 11

year 2 dividend = 11 (1 + 10%) = 12.1

Year 3 dividend = 12.1 (1 + 5%) = 12.705

Value at year 2 = D3 / required rate - growth rate

Value at year 2 = 12.705 / 0.2 - 0.05

Value at year 2 = 12.705 / 0.15

Value at year 2 = 84.7

Value fo shares = 11 / (1 + 0.2)^1 + 12.1 / (1 + 0.2)^2 + 84.7 / (1 + 0.2)^2

Value fo shares = 9.16667 + 8.4028 + 58.8194

Value fo shares = $76.39

4)

year 1 dividend = 5.5 (1 + 5%) = 5.775

year 2 dividend = 5.775 (1 + 5%) = 6.06375

Year 3 dividend = 6.06375 (1 + 5%) = 6.366938

Year 4 dividend = 6.366938 (1 + 2%) = 6.494276

Value at year 3 = D3 / required rate - growth rate

Value at year 3 = 6.494276 / 0.12 - 0.02

Value at year 3 = 6.494276 / 0.1

Value at year 3 = 64.9428

Value of shares = 5.775 / (1 + 0.12)^1 + 6.06375 / (1 + 0.12)^2 + 6.366938 / (1 + 0.12)^3 + 64.9428 / (1 + 0.12)^3

Value of shares = $60.75