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# Valuation and P/E

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James Preston, the chief financial officer of Preston Resources, has been asked to do an evaluation of Dunning Chemical Company by the president and Chair of the Board, Sharon John. Preston Resources was planning a joint venture with Dunning (which was privately traded), and Sharon and James needed a better feel for what Dunning's stock was worth because they might be interested in buying the firm in the future.

Dunning Chemical paid a dividend at the end of year one of \$1.30, the anticipated growth rate was 10 percent, and the required rate of return was 14 percent.

a. What is the value of the stock based on the dividend valuation model (Formula P = )?

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#### Solution Preview

James Preston, the chief financial officer of Preston Resources, has been asked to do an evaluation of Dunning Chemical Company by the president and Chair of the Board,
Sharon John. Preston Resources was planning a joint venture with Dunning (which
was privately traded), and Sharon and James needed a better feel for what Dunning's stock was worth because they might be interested in buying the firm in the future.

Dunning Chemical paid a dividend at the end of year one of \$1.30, the anticipated
growth rate was 10 percent, and the required rate of return was 14 percent.
a. What is the value of the stock based on the dividend valuation model (Formula
P = )?

a.

b. Indicate that the value you computed in part a is correct by showing the value of
D1, D2, and D3 and discounting each back to the present at 14 percent. D1 is
\$1.30 and it increases by 10 percent (g) each year. Also discount back the
anticipated stock price at the end ...

#### Solution Summary

The solution provided for Preston Resources' evaluation of Dunning Chemical.

\$2.49