CF 5-3A – Stock Values – Corporate Finance

Let's take a look at problem five, three, a more dividend discount model. Uh, this one's a little bit different in how it works because it's a company that's going to go out of business. So it doesn't go on forever as the, uh, other questions have implied. Westbrook technologies is a mining operation and pays a constant dividend of $15 per share. So no growth rate on this dividend. After 10 years, the company's expected to shut down and retire the mine. At that point, the company is going to stop paying dividends and stop operating. Uh, the required rate of return on the stock is 14%. So here's what's happening, right? We're going to get a $15 dividend in a year. And so $15 divided by, uh, 1.14 to the power of one. So that's the value of that cashflow today is going to be 15 divided by 1.14 to the one. And in two years, we're going to get again, a $15 dividend. So 15 divided by 1.14 to the two and do that all the way up to 10, 1.14 to the 10, and then it stops and the company's dead, so we're going to get $10, $15 dividends. What's that worth in today's dollars? Well, this is an annuity situation. So we'll use the present value of an annuity formula. We'll do that after I'll do it in my calculator, just because it is fairly quick, straightforward calculation. I'm just clearing things out here. Um, so let's start with my end. Uh, it's 10 years, so 10 goes in as my end. My IY is the discount rate, which is 14%, 14 goes in as my IY. We don't know the PV, the amount of the pit pit easy for me to say. I was stumbled there. The amount of the payment is $15. Forgive that stumbling. But like I said, like porky pigs, that's a very old reference, but there we go. The amount of the regular dividend payment is 15. And the future value is zero. This thing's going to zero. So FB goes into zero. I compute the PV. If I wanted a stock that would pay me a $15 dividend for the next 10 years, 14% discount rate, the value of those future cash flows is $78 and 24 cents. So that's the value of the stock today or an appropriate price to pay for that stock today. There we have it. We've solved five, three, a I'll do it by hand in a second. But if you want to say goodbye, goodbye, hit one of those buttons on your way out of here and see in the next one, but if you want to solve by hand, here we go. Um, he's zoom out a bit. Yeah, there we go. Okay. So the C is, so we're solving for PV of an annuity. The C is the amount of the regular payment, which is this $15 dividend times 1 minus 1 over 1 plus our 1.14 to the power of 10 years, all divided by 0.14. Let me get some brackets in place here. There, good enough. Okay. So clear that out. 1.14 to the power of 10, 3.7. So I go, that's 1.14 to the 10th divide by one, one by that. So 1 over X 0.269, 1 minus that answer. So minus 1 hit the plus minus 0.73 divide by 0.14, 5.2 multiply that by 15. And because I haven't rounded, I get the exact same answer. 78.2417. If you look back in the video, it's going to be 78.2417. And you can see that does indeed match my answer. So we've solved it twice. And don't hit the button twice. I was going to say, Oh, if you liked it, hit the like button twice. No, that erases it. I hit it once, hit it three times, hit it twice, and then hit it a third time to give me an extra thumbs up. Hope you're having a great day, wherever you are in this world. I'll see you in the next video. Goodbye.