Question

Delta plc has 50 million shares in issue, and its capital structure has been unchanged for many years.

Its dividend payments in the years 20X5 to 20X9 were as follows:

End of Year	Dividends, €
2015	2,200,000
2016	2,578,000
2017	3,108,000
2018	3,560,000
2019	4,236,000

Dividends are expected to grow at the same average rate into future.

According to the dividend valuation model, what should be the market price per share at the start of 2020 if the required return on shares is 35% per annum?

Answer 1

Dividend at the end of 2015 = 2200000

Dividend at the end of 2019 = 4236000

Let the growth rate per year be ' r '

So,

2200000 * (1 + r)^4 = 4236000

or, (1 + r)^4 = 4236000 / 2200000 = 1.9255

or , r = 0.178 or 17.8%

According the Gordon growth model,

The value of total no of shares at the end of 2019 or start of 2020 = Dividend in 2020 / ( req return - growth rate)

= (4236000 * 1.178) / (0.35 - 0.178)

= 29011674 $

Price per share = 29011674/50000000 = 0.58 $ (Answer)

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