Homework Answers
| Year | expected dividend = previous year dividendyear dividend*(1+growth rate) | expected dividend | ||
| 0 | 3 | 3 | ||
| 1 | 3*1.12^1 | 3.36 | ||
| 2 | 3*1.12^2 | 3.7632 | ||
| 3 | 3.7632*1.10^1 | 4.13952 | ||
| 4 | 3.7632*1.10^2 | 4.553472 | ||
| 5 | 3.7632*1.10^3 | 5.0088192 | ||
| 6 | 5.008*1.08^1 | 5.40864 | ||
| Horizon value of stock | (expected dividend in year 6/(required rate of return -growth rate) | 5.40864/(15%-8%) | 77.27 | |
| Year | cash flow | present value of cash flow =cash flow/(1+r)^n r =15% | present value of cash flow =cash flow/(1+r)^n r =15% | |
| 1 | 3.36 | 3.36/1.15^1 | 2.92173913 | |
| 2 | 3.7632 | 3.7632/1.15^2 | 2.845519849 | |
| 3 | 4.13952 | 3.7632/1.15^3 | 2.474365086 | |
| 4 | 4.553472 | 4.5534/1.15^4 | 2.603421228 | |
| 5 | 5.0088192 | 5.0088/1.15^5 | 2.490258832 | |
| 5 | 77.27 | 77.27/1.15^5 | 38.41684634 | |
| present value of cash flow or fair value of stock =sum of present value of cash flow | 51.75 | |||
| Yes stock should be purchased as it is under valued | ||||
| present value of cash flow = cash flow at year 1 /(1+r)^1 + cash flow year 2/(1+r)^2………………….cash flow in year 5/(1+r)^5 |
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