Question

Lawrence Industries' most recent annual dividend was $1.68 per share (d=$1.68) and the firm's required return is 11%. Find the market value of Lawrences' shares when dividends are expected to grow at 10% annually for 3 years, followed by a 7% constant annual growth rate in years 4 to infinity. a. The market value of Lawrence's shares is

Answer 1

Step-1:	Present Value of dividend of Year 1 to Year 3
	Year	Dividend	Discount Factor (1.11^-n)	Present Value		Dividend (working)
	1	$         1.85	0.901	$                    1.66		1.68*(1+.10)	=	$       1.85
	2	$         2.04	0.812	$                    1.65		1.85*(1+.10)	=	$       2.04
	3	$         2.24	0.731	$                    1.64		2.04*(1+.10)	=	$       2.24
		Total		$                    4.96
Step-2:	Present value of dividend of 3 Year onwards
	=	(D3*(1+g)/(ke-g))*(1+Ke)^-3		Where,
	=	(2.24*(1+.07)/(.11-.07))*(1.11^-3)		g	=	After 3 year Growth Rate
	=	$       43.81		Ke	=	Required return
				D3	=	Dividend of Year 3
Step-3:	Market Value		=	Step-1 + Step-2
			=	4.96 + 43.81
			=	$                 48.77
Thus, market value of share is $ 48.77