Assume That The Average Firm In Your Company

Solutions to assignment of Anjazikar (May 6)1st step, compute the required rate of return on the stock:Required rate of return = 7% + 6%Required rate of return = 13%2nd step, compute the expected dividends up to end of year 3 when constant growthrate starts:YearGrowth rateDividend3rd step, compute the estimated fair value of the stock at end of year 2 usingthe dividend growth model formula:Re - gwhere: Re - required rate of return g - constant dividend growth rateD3P2 = P2 - estimated stock's price at end of year 2 D3 - expected dividend at end of year 30.13 - 0.06=4th step, compute the current fair value of the stock:End ofyearPVIF @Cash flowStock valuePresent valuePVIF = 1 / (1+r)nValue of the stock now (P0)Required rate of return = Dividend yield + Capital gains yield (which is equal to the constant growth rate)