Question

CEPS Group announced today that it will begin paying annual dividends next year. The first dividend...

CEPS Group announced today that it will begin paying annual dividends next year. The first dividend will be OMR 0.52 a share. The following dividends will be OMR 0.67, OMR 0.72, OMR 0.81, and OMR 0.90 a share annually for the following 4 years, respectively. After that, dividends are projected to increase by 5 percent per year. How much are you willing to pay to buy one share of this stock today if your desired rate of return is 9.5 percent?

Homework Answers

Answer #1
Year Dividend PV factor @9.5%, 1/(1+r)^time Dividend * PV factor
1         0.52                0.9132            0.47
2         0.67                0.8340            0.56
3         0.72                0.7617            0.55
4         0.81                0.6956            0.56
5         0.90                0.6352            0.57
5       21.00                0.6352          13.34
Share price today          16.06
Current Dividend             0.90
Rate of return 9.50%
Growth Rate 5.00%
Share Price at the horizon i.e. T5 =Current Dividend*(1+Growth rate)/(Rate of return-Growth Rate)
Share Price at the horizon i.e. T5 =0.9*(1+0.05)/(0.095-0.05)
Share Price at the horizon i.e. T5           21.00
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