Natalie is interested in valuing the shares of Union Aerospace (UA).UA pays dividends annually.She expects the stock to pay dividends of $3 at the end of each of the next four years.Thereafter,she expects the dividend to grow at 7% per annum in perpetuity.If her required return is 12%,then how much should she pay for a share?

Question

Quizplus · Accepted Answer

Step 1 - Use the present value of an annuity formula for the next four years. 11ea7fdb_fbf0_0da9_a768_2d9dfc347aad_TB2902_11 = PMT × 11ea7fdb_fbf0_0daa_a768_fbb8ced887d6_TB2902_11 / i 11ea7fdb_fbf0_0dab_a768_3f53a9672e9a_TB2902_11 = 3 × 11ea7fdb_fbf0_34bc_a768_019e1150df53_TB2902_11 / 0.12 11ea7fdb_fbf0_34bd_a768_0b7303ec92e3_TB2902_11 = 3 × 11ea7fdb_fbf0_34be_a768_d9cf0d97df8e_TB2902_11 = $9.11
Step 2 - Use the Gordon model to get the price of the stock and discount it back to today. 11ea7fdb_fbf0_34bf_a768_e1e6e6bc20fb_TB2902_11 = 11ea7fdb_fbf0_34c0_a768_25e891eb0687_TB2902_11 11ea7fdb_fbf0_34c1_a768_2bc0cbfc1680_TB2902_11 = 11ea7fdb_fbf0_5bd2_a768_5558d4c09225_TB2902_11 11ea7fdb_fbf0_5bd3_a768_7973db5cc0dc_TB2902_11 = 64.20
PV = 11ea7fdb_fbf0_5bd4_a768_a301724c22fc_TB2902_11 PV = 11ea7fdb_fbf0_5bd5_a768_77799ce4b915_TB2902_11 = $40.80
Step 3 - Add the present values together.
9.11 + 40.80 = $49.91

Natalie Is Interested in Valuing the Shares of Union Aerospace