Question

Calculate the present value of both share prices:

On 1st January 2018, you are looking for a share for possible inclusion in your investment portfolio. You have found two shares in two different markets. Your analysis says that both shares are highly positively correlated, so you are considering them as mutually exclusive. Your budget does not permit you to invest more than $90 for a share. The opportunity cost of your capital is 15%.

Share 1:

The company's income is growing at 11%. The dividend payment of $3.43 reflects such growth and same growth is expected to continue in the foreseeable future.

31st December of	Annual Dividend payments
2018	$3.43

Share 2:

The expected dividend payments are given in the following table. It pays $7 in 2016, $5 in 2017. Then remains same at $6 per year for five years (2018-2022), before getting to 10% growth in 2023. This growth rate reflected in 2023's dividend is expected to remain same in the foreseeable future.

31st December of	Annual Dividend payments
2016	$7.00
2017	$5.00
2018	$6.00
2019	$6.00
2020	$6.00
2021	$6.00
2022	$6.00
2023	$6.60
2024	$7.26
2025	$7.99

Answer 1

share 1 )

Price= D1/(Rs-g]

       = 3.43 /[.15-.11]

        = 3.43 /.04

          = $ 85.75 per share

share2 )

Terminal value at 2025 = D2025(1+g)/(Rs-g)

            = 7.99(1+.1)/(.15-.10)

            = 7.99 * 1.1 / .05

            = 175.78

Total year from 2018 -2022=5 years

present value = [PVA 15%,5*D] +[PVF15%,6*D2023]+[PVF15%,7*D2024]+[PVF15%,8*(D2025+ Terminal value)]

=[3.35216*6]+[.43233*6.6]+[.37594*7.26]+[.32690*(7.99+175.78)]

= 20.11296+ 2.853378+ 2.729324+ 60.07441

   = $ 85.77 per share