# Calculating fair value of stocks

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.