Question

15. Hallmark Inc. has dividend per share of $2.10, $2.65, $3.03 and $3.22 for the next four years. The company believes that the income will grow by a constant 4% after year four. Discount rate is 7%. What is the value of Hallmark Inc.?

Answer 1

P0 = $94.36658 rounded off to $94.37

Step-by-step explanation:

To calculate the value per share of Hallmark Inc. we will use the dividend discount model or DDM, DDM values the price of a stock based on the present value of the expected future dividends from the stock. The formula for price under DDM of this stock is,

P0 = D1 / (1+r) + D2 / (1+r)^2 + D3 / (1+r)^3 + D4 / (1+r)^4 +

[(D4 * (1+g)) / (r - g)] / (1+r)^4

Where,

• r is the required rate of return
• g is the constant growth rate
• P0 is price or value per share today

P0 = 2.1 / (1+0.07) + 2.65 / (1+0.07)^2 + 3.03 / (1+0.07)^3 +

3.22 / (1+0.07)^4 + [(3.22 * (1+0.04)) / (0.07 - 0.04)] / (1+0.07)^4

P0 = $94.36658 rounded off to $94.37