Purchase Solution

# Estimating the fair value of given stocks

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1. Computerplus company already paid a \$6 dividend per share this year and expects dividends to grow 10% annually for the next four years and 7% annually thereafter. Compute the Price of the companies stock (Note: the required rate of return on this stock is 11%).

2. The chairman of World Food Corporation announced that the firm's dividends will grow at a rate of 18% for the next three years, and that thereafter the annual rate of growth is expected to be only 6%. The annual dividend per share is estimated to be \$4 in the next year. If a required rate of return of 15% is assumed, what is the highest price you are willing to pay for a share of World Food Corporation's common stock?

3. The last dividend paid by stock A was \$2 per share. With a 9% required rate of return, calculate the market value of this stock if the company has no growth in the future.

##### Solution Summary

Solution describes the steps to estimate the current stock value in the given cases.

##### Solution Preview

1. Computerplus company already paid a \$6 dividend per share this year and expects dividends to grow 10% annually for the next four years and 7% annually thereafter. Compute the Price of the companies stock (Note: the required rate of return on this stock is 11%).

Required rate of return=r=11%
Current dividend=Do=\$6
Growth rate for year 1-4=g1=10%
Growth rate thereafter=g2=7%

Expected dividend next year=D1=Do*(1+g1)=6*(1+10%)=\$6.60
Expected dividend at the end of year 2 =D2=D1*(1+g1)=6.6*(1+10%)=\$7.26
Expected dividend at the end of year 3 ...

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• BEng (Hons) , Birla Institute of Technology and Science, India
• MSc (Hons) , Birla Institute of Technology and Science, India
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