Kodak used to primarily produce and distribute photographic paper and developing

Question

Kodak used to primarily produce and distribute photographic paper and developing materials for traditional (i.e., non digital) photographic methods. A sizable portion of their business was home photography. Since they were one of the few suppliers of such materials, as the population grew, so did the demand for their product. Consider the value of Kodak in 1970. At that time, the investment capital per share (ICPS) for Kodak was $20. Given their market power, their return on investment was 15%. During that time, the required rate of return on Kodak was .14. In 1970, the policy of Kodak was to plowback 25 percent of its earnings per share.

Given Kodak

Explanation / Answer

Answer;

Calculation of fair price for Kodak in 1970 immediately after it paid its 1970 dividend:

Dividend for the year 1970 = Share price *ROI* (1- Plowback ratio) = $20*15%*(1-0.25) = $2.25 per Share

Expected Growth rate (g) = ROI * Plowback ratio = 15%*0.25 = 3.75% = 0.0375

Expected Dividend (D1) = Current divided *(1+g) = 2.25*(1+0.0375) = $2.33 per Share

Using the formula:

Fair Price   = D1 /(Ke

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