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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?

#### 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