Use the Dividends and Earning approach to value a share of Merck (MRK) stock. Yo

Question

Use the Dividends and Earning approach to value a share of Merck (MRK) stock. Your investment horizon is 5 years. You expect to earn dividends according to the chart below. Your forecast of sales and profit margins leads you to expect to be able to sell the shares in 5 years for $60. A CAPM analysis gives a required return of 10%. [You may check this answer by e-mailing me by Saturday].

Year       Expected Dividend

1             $1.46

2             $1.58

3             $1.70

4             $1.86

5             $2.02

Explanation / Answer

Years 1 2 3 4 5 Dividends 1.46 1.58 1.7 1.86 2.02 Sell value 0 0 0 0 60 NPV of dividends $     6.43 NPV of sell value $   37.26 At present Total share value $   43.69

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