How would the value be calculated in the following: Net Income 3,000 Dividends 1,000 Total Assets - 12/31/05 35,000 Total Liabilities - 12/31/05 21,225 Number of shares outstanding 1,000 Cost of Equity 12% Using the dividend discount model, assuming dividends grow at 10% per year for the next two years and at 5% thereafter, what is the value per share of Rivaz Corporation at 12/31/05? A) $16.61 B) $16.51 C) $16.42 D) $14.87 Answer: C
I don’t solve for any of these values. I’m assuming dividends are paid out, but even after I change that assumption I get a different answer.
Year 1 dividend 1.10 Year 2 dividend 1.21 Terminal value end year 2 = (1.21*1.05)/(0.12-0.05)=18.15 Discount year 1 values at 12% and year 2 values 2 year at 12% then you get to C
Treynor, unfortunately I do not see how you get to C. Can you provide a bit more detailed information? I am not sure where the terminal value 18.15 comes into the calculation. thank you
It’s $18,150 which you then divide by 1000 to get the per share price. At end of year 2, use the model to get the present value of future dividiends, that’s the $18,150. The rest is easy.
Oh, duh. Dreary’s right. I was multiplying the terminal value dividend by a 10% growth rate instead of a 5%.
Div1 = $1.00*1.1 = $1.10 Div2 = $1.10*1.1 = $1.21 Term = ($1.21*1.05) / (.12-.05) = $1.2705 / .07 = $18.15 PV = $1.10/1.12 + ($1.21+$18.15)/1.12^2 = A
sorry but I just dont see how you get C. I get 16.9.
As artvandalay did, and it is C. Do the math: PV = $1.10/1.12 + ($1.21+$18.15)/1.12^2 = c
OK I see now. I did not add the dividend in yr 2. Art: I think you made a calculation error. I get 16.4 © and not A
Oops, yep I meant C
I would switch to the Graham & Dodd.