0.11 0 1 2 3 0.28000000000000003 0.11 0.06 1.45 1.8559999999999999 2.0601600000000002 2.1837696000000002 43.675392000000002 1.8559999999999999 45.735552000000006 1.6720720720720719 1.6720720720720721 Problem: Fasco Industries Year Growth Rates Dividend Total Cash Flows PV of Cash Flows PV = FV/(1 + i)^n Return on Stock (Rs) = Estimated Stock Price = Value in T2 = D3/(r-g3) Unit 6 Challenge Problem Template Here i = r 2. Why are cash flows that are connected to common stock difficult to estimate? How does this compare to those related to bonds. 1. Fasco Industries just paid a dividend of D0 = $1.45. Analysts expect the company’s dividend to grow by 28% this year, by 11% in Year 2, and at a constant rate of 6% in Year 3 and thereafter. The required return on this low-risk stock is 11.00%. What is the best estimate of the stock’s current market value? Cash flows connected to common stock are difficult to estimate because you will always have to make assumptions about the growth rate of the earnings meanwhile, bond cash flows are set at time of issue (at Face Value times the coupon rate). Caterina Vazquez P0(price today) = 1.85/1.11^1 + 2.05/1.11^2 + 43.40/1.11^2 = $38.55 Stock Price = the Sum of the Present Value of All Future Dividends notes
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