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    Calculating fair value of stocks

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    1.) If a company's last dividend was $ 1.00 per share and dividends are expected to grow at a rate of 6%. What is the current value of a share of this stock to an investor who requires a 10 percent rate of return?

    2.) What is the current per-share value of JRM Corporation to an investor who requires a 10 percent annual rate of return, if JRM's current per-share dividend is $3 and expected to remain at $3 for the foreseeable future?

    3.) A company is expected to pay dividends of $4.50, $4.50 and $5.50 over the next three years. The stock is expected to have a value of $50.00 three years from today. If the risk-free rate is 5%., the market risk premium 14% and Pure has a beta of 1.14, what is the current value of Pure?

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    Solution Preview

    1.) If a company's last dividend was $ 1.00 per share and dividends are expected to grow at a rate of 6%.
    What is the current value of a share of this stock to an investor who requires a 10 percent rate of return?

    Last dividend=Do=$1.00
    Growth rate=g=6%
    Expected next dividend =D1=Do*(1+g)=1.00*(1+6%)=$1.06
    Required rate of return=r=10%
    Current value of share=Po=?

    We can find the current value of stock by using constant growth model. It ...

    Solution Summary

    There are three problems. Solutions depict the methodology to estimate the fair value of stocks.

    $2.19

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