Question
Dvorak Enterprises is expected to pay a stable dividend of $7 per share per year for...
Dvorak Enterprises is expected to pay a stable dividend of $7 per share per year for the next 8 years. After that, investors anticipate that the dividends will grow at a constant rate of 3 percent per year indefinitely. If the required rate of return on this stock is 12 percent, what is the fair market value of a share of Dvorak?
Homework Answers
Answer #1
Given D1 to D8 = $ 7
D9 = D8 ( 1+g )
= $ 7 ( 1 + 0.03 )
= $ 7 (1.03 )
= $ 7.21
P8 = D9 / (Ke - g)
= $ 7.21 / ( 12% - 3%)
= $ 7.21 / 9%
= 80.11
Price of stock = PV of cashflows from it.
Fair Price = 67.13
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