Calculating the Expected Value of a Share of Devon Oil Services

What is the expected value of a share of Devon on December 1, 2018?

The expected value of a share of Devon on December 1, 2018, is __________ .

Answer:

The expected value of a share of Devon on December 1, 2018, is approximately $5,010.34.

To calculate the expected value of a share of Devon on December 1, 2018, we need to discount the future dividends to their present value.

Given the following information:

Annual dividend in 2021: $0.45

Dividend growth rate: 4.6% per year

Equity cost of capital: 11%

We can use the dividend discount model (DDM) formula to calculate the present value of dividends:

Present Value = Dividend / (Cost of Capital - Dividend Growth Rate)

Using the formula, the present value of the expected dividends in 2021 is:

Present Value of 2021 Dividend = $0.45 / (0.11 - 0.046) = $0.45 / 0.064 = $7,031.25

To find the expected value of a share of Devon on December 1, 2018, we need to discount the present value of 2021 dividends back to 2018. Assuming a constant growth rate, we can use the formula:

Expected Value = Present Value / (1 + Cost of Capital)^n

Where n is the number of years from 2018 to 2021. In this case, n = 3.

Expected Value = $7,031.25 / (1 + 0.11)^3 = $5,010.34

By using financial models and calculations, we can estimate the potential value of a share of Devon Oil Services. Understanding these factors can help investors make informed decisions based on projected future returns.