Question

If Zenyatta Inc. has the following anticipated dividends: in year 1 of $4.00, in year 2 of $3.50, after that dividends are expected to grow at a 1.4% rate. What is a fair price if the required return is 5%

Answer 1

Answer:

The fair price per share today is $96.40

Explanation:

The fair price per share can be calculated using the DDM approach whereby the expected future dividends are discounted back to calculate the fair value of the share today.

The fair price per share will be,

P0 or V = 4 / (1+0.05) + 3.5 / (1+0.05)²  + [(3.5 * (1+0.014)) / 0.05 - 0.014] / (1+0.05)²

Fair price per share = $96.40

Answer 2

Answer:

$96.403(Approx)

Explanation:

Using The dividend discount model (DDM) which is a method or technique that is used in the valuation of a company's stock price based on the premise that the company’s stock is worth of all of its potential dividend payments, discounted back to their current value.

Value after year 2=(D2*Growth rate)/(Required return-Growth rate)

=(3.5*1.014)/(0.05-0.014)

=98.583

Hence fair price=Future dividend and valu x Present value of discounting factor(rate%,time period)

=4/1.05+3.5/1.05^2+98.583/1.05^2

=$96.403(Approx)