Question

In: Finance

The forecasted dividend per share in 2019 (it is 2011 in the case) is $1.21. If...

The forecasted dividend per share in 2019 (it is 2011 in the case) is $1.21. If the dividend per share is expected to grow by 6% each year over the period 2020 to 2024, and stabilizes to 3% each year forever, determine the following:

C) What is the estimated market value of equity?

discount rate = 12%

Solutions

Expert Solution

Required rate of return (Ke )= 12% or 0.12

Growth for year (2020 to 2024) 1to 5 year = 6% or 0.06

Growth from 6 year onwards = 3% or 0.03
D1 = 1.21
D2 = 1.21 * (1 + 0.06) = 1.2826
D3 = D2 *(1+0.06) = 1.359556
D4 = D3 *(1+0.06) = 1.44112936
D5 = D4*(1+0.06) = 1.527597122
D6 = D5 *(1+0.06) = 1.619252949
D7 = D6*(1+0.03) = 1.667830537

Price of stock at end of Year 6(P6) = D7/(Ke -g)

1.667830537/(0.12 - 0.03)
18.53145042

Current market price today is present value of stock that is equal to present value of dividend received upto 2 Years and Price of stock received at end of 2 Year
Year Cash flows P.V.F.@ 12%

Cash flows * PVF
1 (D1) 1.2100 0.8929 1.0804
2 (D2) 1.2826 0.7972 1.0225
3 (D3) 1.3596 0.7118 0.9677
4 (D4) 1.4411 0.6355 0.9159
5 (D5) 1.5276 0.5674 0.8668
6(D6) 1.6193 0.5066 0.8204
6(P6) 18.5315 0.5066 9.3886
Current value 15.0622

so, best estimate of current market value of Equity is $15.06

Note : PVF formula = 1/(1+i)^n

For 1 year, 1/(1+0.12)^1 =

 0.8928571429

For 2 year, 1/(1+0.12)^2 =

 0.7971938776

Please thumbs up.

jeff jeffy answered 10 months ago
Next > < Previous

Related Solutions

The forecasted dividend per share in 2019 (it is 2011 in the case) is $1.21. If...
The forecasted dividend per share in 2019 (it is 2011 in the case) is $1.21. If the dividend per share is expected to grow by 6% each year over the period 2020 to 2024, and stabilizes to 3% each year forever, determine the following: B) the true price of the stock. Based on CAPM-Cost of equity = 7.01%
A stock paid a dividend of $1 per share in 2019. Dividend will increase by 3%...
A stock paid a dividend of $1 per share in 2019. Dividend will increase by 3% for the next two years and remain the same for the next three years. Thereafter, dividend will grow by 2% each year forever. Assume that the beta of the stock is 1.3, the equity risk premium is 5%, and the market return is 6.5%. Find the risk-free rate All things being equal, do you expect the stock to outperform the market? Why? Estimate equity...
AXP just paid a dividend of $0.80 per share and analysts forecasted five-year growth rates of...
AXP just paid a dividend of $0.80 per share and analysts forecasted five-year growth rates of 10.54 percent per year for AXP and 13.21 percent per year for the industry average. Assume the growth rate for the industry average will remain constant. Then, assuming AXP’s growth rate will revert to the industry average after five years, what share price would we place on AXP today, if we use a discount rate of 15 percent per year?
If a company pays a dividend of $0.50 per share and this dividend is expected to...
If a company pays a dividend of $0.50 per share and this dividend is expected to rise at a constant rate of 5%, what dividend amount will be paid in 40 years?
Suppose that a firm’s recent earnings per share and dividend per share are $3.90 and $2.90,...
Suppose that a firm’s recent earnings per share and dividend per share are $3.90 and $2.90, respectively. Both are expected to grow at 7 percent. However, the firm’s current P/E ratio of 20 seems high for this growth rate. The P/E ratio is expected to fall to 16 within five years. Compute the dividends over the next five years. (Do not round intermediate calculations and round your final answers to 3 decimal places.)     Dividends Years   First year $3.10   Second year...
Suppose that a firm’s recent earnings per share and dividend per share are $3.00 and $2.30,...
Suppose that a firm’s recent earnings per share and dividend per share are $3.00 and $2.30, respectively. Both are expected to grow at 10 percent. However, the firm’s current P/E ratio of 24 seems high for this growth rate. The P/E ratio is expected to fall to 20 within five years. Compute the dividends over the next five years. (Do not round intermediate calculations. Round your final answer to 3 decimal places.)   Dividends Years   First year $   Second year $...
ZAZ stock is currently trading at $163 per share. A dividend of $1.47 per share is...
ZAZ stock is currently trading at $163 per share. A dividend of $1.47 per share is expected to be paid on the stock in two months. A three month European put option with $165 strike on ZAZ is trading at $1 in the options market. 1. Does an arbitrage opportunity exist regarding securities markets for T-Bills, ZAZ stock and this put option? Explain 2. Completely specify a set of trades now that exploit the arbitrage opportunity. 3. Compute the profit...
Suppose that a firm’s recent earnings per share and dividend per share are $2.85 and $2.00,...
Suppose that a firm’s recent earnings per share and dividend per share are $2.85 and $2.00, respectively. Both are expected to grow at 12 percent. However, the firm’s current P/E ratio of 21 seems high for this growth rate. The P/E ratio is expected to fall to 17 within five years. Compute the dividends over the next five years DIVIDENDS YEARS FIRST YEAR SECOND YEAR THIRD YEAR FOURTH YEAR FIFTH YEAR Compute the value of this stock price in five...
Suppose that a firm’s recent earnings per share and dividend per share are $3.30 and $2.30,...
Suppose that a firm’s recent earnings per share and dividend per share are $3.30 and $2.30, respectively. Both are expected to grow at 9 percent. However, the firm’s current P/E ratio of 32 seems high for this growth rate. The P/E ratio is expected to fall to 28 within five years. Compute the dividends over the next five years. Compute the value of this stock in five years. Calculate the present value of these cash flows using an 11 percent...
Suppose that a firm’s recent earnings per share and dividend per share are $2.75 and $1.80,...
Suppose that a firm’s recent earnings per share and dividend per share are $2.75 and $1.80, respectively. Both are expected to grow at 10 percent. However, the firm’s current P/E ratio of 19 seems high for this growth rate. The P/E ratio is expected to fall to 15 within five years. Compute the dividends over the next five years. (Do not round intermediate calculations. Round your answers to 3 decimal places.)    Compute the value of this stock price in...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT