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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 11 months ago
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