Long Drug Stores is expected to pay a $0.56 dividend next year and to trade at $45.50 per share at that year-end. Comparable investments require a 6.80% return.
- A.What is the maximum price today?
- B.Separate dividend yield from capital-gain yield.
Dividend Discount Valuation
A.
$43.13 per share.
B.
Use the unrounded share price from part A in both calculations.
| Return component | Annual return |
|---|---|
| Dividend yield | 1.30% |
| Capital-gain yield | 5.50% |
| Total | 6.80% |
The two expected return components add to the required 6.80% when the share is purchased at fair value.
Dividend Discount Valuation
Solid Air pays €10 annually for the next six years and then permanently stops paying dividends. Assume no terminal liquidation proceeds. Required return is 10%.
- A.Calculate the share value.
A.
€43.55.