An attorney from Indianapolis has recently contacted you for help in determining

Question

An attorney from Indianapolis has recently contacted you for help in determining the value ofone of his client’s portfolios of securities. The client has the following in her stockportfolio:

a) 1000 shares of Crean, Inc. common stock. Crean just paid a dividend of $1.25.   Therequired return on the stock is 10%. The dividends for the stock are expected to grow at thefollowing rates:    years 1-2: 20%    years 3-5: 8%    years 6+: 4%

Based on your knowledge of how to value securities, what is the value?

Explanation / Answer

1.944            [1.8(1+.08)]

24.4040

Terminal value = 2.2675(1+.04) /(.10 -.04)]

                   = 2.2675 *1.04 / .06 = 39.3030

Year Dividend (d) PV at 10% D* PV 1 1.50              [1.25(1+.20)] .90909 1.3636 2 1.8                 [1.5(1+.2)] .82645 1.4876 3

1.944            [1.8(1+.08)]

.75131 1.4605 4 2.10                [1.944(1+.08)] .68301 1.4343 5 2.2675              [2.10(1+.08)] .62092 1.4079 Terminal value at year 5 39.3030 .62092

24.4040

Current value 31.56

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