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    Common Stock Value

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    P7-11 Common stock value-Constant growth Elk County Telephone has paid the
    dividends shown in the following table over the past 6 years.

    Year Dividend per share
    2006 $2.87
    2005 2.76
    2004 2.60
    2003 2.46
    2002 2.37
    2001 2.25
    The firm's dividend per share next year is expected to be $3.02.
    a. If you can earn 13% on similar-risk investments, what is the most you would be willing to pay per share?
    b. If you can earn only 10% on similar-risk investments, what is the most you would be willing to pay per share?
    c. Compare and contrast your findings in parts a and b, and discuss the impact of changing risk on share value.

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    Solution Preview

    a. If you can earn 13% on similar-risk investments, what is the most you would be willing to pay per share?

    What we would be willing to pay is the present value of all dividends. Using the constant growth model
    PV of all dividends (Price of the share) = D1/(rs-g)
    Where
    D1 = expected dividend next year = $3.02
    rs = required return = 13%
    g = dividend growth rate. We estimate ...

    Solution Summary

    The solution explains how to calculate the common stock value and the impact of changing risk on share value.

    $2.19

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