Question

You are offered two stocks, but aren’t sure if quoted the prices are reasonable. So you decide to determine the fair price of both given some additional information you found.

Stock name: A

Dividend: 4.75$

initial growth: 2%

Later growth: 2% forever

Stock name: B

Dividend: 4.45$

initial growth: 4% annually for the next 8 years (years 2-9)

later growth: flat thereafter (DIV10 = DIV9) forever

Your assumed annual discount rate is 11%.

What is the price of stock B?

A. $60.37

B. $55.43

C. $51.33

D. $49.84

E. $49.06

Answer 1

B. 55.43

year	expected dividend		PVF	PV OF DIVIDEND
1	=4.45	4.450		4.450
2	4.45 x 1.04 =	4.628	0.901	4.169
3	4.628 x 1.04 =	4.813	0.812	3.906
4	4.813 x 1.04 =	5.006	0.731	3.660
5	5.006 x 1.04 =	5.21	0.659	3.429
6	5.21 x 1.04 =	5.41	0.593	3.213
7	5.41 x 1.04 =	5.63	0.535	3.010
8	5.63 x 1.04 =	5.86	0.482	2.820
9	5.86 x 1.04 =	6.09	0.434	2.643
				31.301
price of share at the end of 9th year (P9)=		d9 x (1+g)
		ke- g
	=	55.363
present value of share =		PV of P9 + PV of dividends
	=	P4 x PVF@11% + PV of dividends
	=	55.43