Question

Company CDE generated cash flows of $2.00 per share last year. CDE’s cost of capital 12%. Growth is expected to be 12% in year one, 11% in year two, 10% in year three, then decline to 6% over the next four years, and then continue at 6%. estimate the value per share. PLEASE SHOW YOUR WORK

Answer 1

	Step 1)
	CALCUALTION OF D1,D2,D3, D4 & D5
				Last Dividend	Growth Rate	Dividend of the year
	Dividend after the Year 0= D0			0	0	$                            2.00
	Dividend after the Year 1= D1			$                     2.00	12%	$                            2.24
	Dividend after the Year 2 = D2			$                     2.24	11%	$                            2.49
	Dividend after the Year 3 = D3			$                     2.49	10%	$                            2.74
	Dividend after the Year 4 = D4			$                     2.74	6%	$                            2.90
	Dividend after the Year 5 = D5			$                     2.90	6%	$                            3.07
	Step 2 =CALCULATION OF THE VALUE OF THE STOCK AT THE END OF FORTH YEAR
	Formula	P4 = D5 / Ke - g
	Ke = Cost of Equity = Expected return = 12% = 0.12
	g = Growth rate = 6% = 0.06
	P4 = price of the stock at the end of 4th year
	D5 = Dividend at the end of 5th year = $ 3.07
		P4 = D5 / Ke - g
		P4 = $ 3.07 / 0.12 - 0.06
		P4 = $ 3.07 / 0.06			-
		P4 = 51.17
	STEP 3: CALCLATION OF PRESENT VALUE OF THE STOCK
		Year	Dividend	PVF @ 12%	Present Value
		1	$                      2.24	0.89286	$                          2.24
		2	$                      2.49	0.79719	$                          2.49
		3	$                      2.74	0.71178	$                          2.74
		4	$                      2.90	0.63552	$                          2.90
	Stock Value P4	4	$                    51.17	0.63552	$                        32.52
			Total		$                        42.88
	Answer = Value of Shares = $ 42.88