Question

What is the value of a share of Henley Inc. to an investor who requires a 11 percent

rate of return if Henley is expected to pay a fixed dividend of $1.10 for the next 3 years and
then the dividends will grow at a constant rate of 5% indefinitely

Answer 1

Value of Henley Inc.'s share is $16.76

Explanation:

The present value of the dividends over for the three years and the terminal value of the dividends would give us a fair share price that an investor would pay

Year 1 PV of dividends=$1.10/(1+11%)^1=$0.99

Year 2 PV of dividends=$1.10/(1+11%)^2=$0.89

Year 3 PV of dividends=$1.10/(1+11%)^3=$0.80

The terminal value formula=dividend*(1+g)/(r-g)

g is the dividend growth rate of 5%

r is the investor's required rate of return which is 11%

terminal value=$1.10*(1+5%)/(11%-5%)=$19.25

The terminal is discounted to present value using the discount factor of year 3

PV of terminal value =$19.25 /(1+11%)^3=$ 14.08

Total present values=$0.99+$0.89+$0.80+$14.08 =$16.76