Fly Now Inc. paid an annual dividend of $3.20/share on 31 December 2014. The risk free rate is 1% per annum, and the beta of this stock is 1.1. The expected market return is 6.5%. The annual dividend growth is 3% per year, and is paid at the end of each year.
(a) Calculate the value of FlyNow’s stock as of 1 January 2015.
(b) Fiona, the analyst covering FlyNow, then revises her dividend growth model to assume that from 1 January 2017 onwards, the expected dividend growth drops to 1.2% per year. Calculate the revised valuation of FlyNow’s stock as of 1 January 2015.
(c) Fiona’s manager, Jane, later pops by her desk and suggests that after further meetings with FlyNow’s CFO, assume that from 1 January 2017 onwards, the expected dividend growth is zero. Calculate the revised valuation of FlyNow’s stock as of 1 January 2015.
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