Expected Value of a Share of Devon in 2014
What is the expected value of a share of Devon on December 1, 2014?
The expected value of a share of Devon on December 1, 2014 is $____.
According to the question the expected value of a share of Devon on December 1, 2014, is $0.9433.
To calculate the expected value of a share of Devon on December 1, 2014, we need to discount the expected future dividends to their present value.
Given:
Annual dividend in 2017 = $0.35
Dividend growth rate = 4.8% per year
Equity cost of capital = 11.5%
First, we need to determine the expected dividends for each year until December 1, 2014, using the dividend growth rate:
Dividends in 2015 = $0.35 * (1 + 4.8%) = $0.3658
Dividends in 2016 = $0.3658 * (1 + 4.8%) = $0.3826
Dividends in 2017 = $0.3826 * (1 + 4.8%) = $0.4008
Now, we can calculate the present value of these expected dividends using the equity cost of capital:
Present Value of Dividends in 2015 = $0.3658 / (1 + 11.5%) = $0.3276
Present Value of Dividends in 2016 = $0.3826 / (1 + 11.5%)^2 = $0.3179
Present Value of Dividends in 2017 = $0.4008 / (1 + 11.5%)^3 = $0.2978
Finally, we sum up the present values of the expected dividends:
Expected Value of a Share of Devon on December 1, 2014 = Present Value of Dividends in 2015 + Present Value of Dividends in 2016 + Present Value of Dividends in 2017
= $0.3276 + $0.3179 + $0.2978
= $0.9433
Therefore, the expected value of a share of Devon on December 1, 2014, is $0.9433.