Question 6

Vincent Nguyen, an analyst, is examining the stock of British Airways (London Stock Exchange: BAY) as of the beginning of 2008. He notices that the consensus forecast by analysts is that the stock will pay a 4 dividend per share in 2009 (based on 21 analysts) and a 5 dividend in 2010 (based on 10 analysts). Nguyen expects the price of the stock at the end of 2010 to be 250. He has estimated that the required rate of return on the stock is 11 percent. Assume all dividends are paid at the end of the year.

Required:

a) Using the DDM, estimate the value of BAY stock at the end of 2009.

b) Using the DDM, estimate the value of BAY stock at the end of 2008.