Question

Calculate the fair value based on the following information: Current dividend = $1.50 Normal growth rate = 3% Super growth rate = 19% Duration of the super growth rate = 10 years Required return 11%

Answer 1

To obtain the fair value of share, first calculate the high growth dividends and discount it back to their present values. After 10 years, calculate the constant growth dividend and discount it back to its present value. Add up all the amounts obtained to get the fair value.

Period	Dividend per year	Calculation	Amount($)	PV
1	D1	1.5 x 1.191	1.785	1.608
2	D2	1.5 x 1.192	2.12	1.72
3	D3	1.5 x 1.193	2.53	1.85
4	D4	1.5 x 1.194	3.01	1.98
5	D5	1.5 x 1.195	3.58	2.12
6	D6	1.5 x 1.196	4.26	2.28
7	D7	1.5 x 1.197	5.07	2.44
8	D8	1.5 x 1.198	6.03	2.62
9	D9	1.5 x 1.199	7.18	2.81
10	D10	1.5 x 1.1910	8.54	3.01
11	D11	8.54(1+0.03)/(0.19-0.03)	54.98
		54.98/1.1910		9.65
		Total		32.09

Thus fair value is $32.09