a real estate co. plans to pay a $7.00 annual dividend for the next 14 years.

Question

a real estate co. plans to pay a $7.00 annual dividend forthe next 14 years. the required return on this is 9.5%.  What is the current price per share?

Answer 1

This problem has a lack of information. What happens after the 14 years? If this a real estate company that is selling a participation in a sandwich lease project and the asset will terminate in 14 years then;

PV= from a business calculator
N=14
I=9.5
PV=? (What we are looking for)
PMT= $7.00
FV=0
Hit PV you get $53.00

If the real estate company is leasing property with a 14 year lease with expectations that this will renew at the same rent and no increase but can reasonably be expected to a perpetuity than the value is;
PV= $7.00/ .095 = $73.60

If there is growth then the growth has to be subtracted from the required rate. For example if the growth is expected to be 3% in market rates but constrained by current leases then the future dividend in year 15 (Dividend (sub 1)can be expected to be $10.91. This new dividend can be capitalized at 6.5%. That is 9.5% for the appropriate discount factor less 3% growth rate. The value in 14 years will be

New Dividend/ (Required rate- Growth rate)= $ 10.91/(.095-.03)= $167.85
But this amount is 14 Years in the future. Bring that back to today as
N=14
PV=?
PMT=0
FV= $167.85
Hit PV You get $47.11

Last item, you now have to add Current Value of the $7 for 14 Years to the PV of the FV i.e. the PV of the $162.02 for a total value of $88.47


PV of $7 for 14 years at 9.5%= $53.00
PV of $167.85 in 14 Years at 9.5%= $47.11
Total current value = $100.11

Assumptions must be made,
Is it $7 per year then ZERO! PV= $53
If there is cash flow after year 14 then what is it?
At just a modest 3% growth rate the value could be double, from $53 to $100.

 

Answer 2

The value of a REIT is essentially the stream of earnings/dividends it is required to pay out each year.

 

The present value of 14 annual payments of $7 each discounted at a required rate of return of 9.5% per year is $53.

 

PV = dividend*(1-(1+i)^-n/i)

where i is the interest rate, and

n is the number of periods

 

= 7*(1-1.095^-14)/.095 = $53