Question

CEPS Group just paid an annual dividend of OMR 1.75 a share. The firm plans to increase the annual dividends by 5 percent over the next 3 years. After that time, the dividends will be held constant at OMR 2.5 per share. What is this stock worth today at a 9 percent discount rate? show the answer in detail.

Answer 1

r = discount rate = 9%

g = growth rate = 5%

Annual Dividend Paid = D0 = OMR 1.75

Dividend in Year 1 = D1 = D0 *(1+g) = OMR1.75 * (1+5%) = OMR 1.8375

Dividend in Year 2 = D2 = D1 *(1+g) = OMR 1.8375 * (1+5%) = OMR 1.929375

Dividend in Year 3 = D3 = D2 *(1+g) = OMR 1.929375 * (1+5%) = OMR 2.02584375

Dividend in Year 4 = D4 = OMR 2.5

Horizon Value = D4 / r

= OMR 2.5 / 9%

= OMR 27.777778

Value of Stock Today = [D1 /(1+r)^1] + [D2 /(1+r)^2] + [D3 /(1+r)^3] + [Horizon Value /(1+r)^3]

= [OMR 1.8375 / (1+9%)^1] + [OMR 1.929375 / (1+9%)^2] + [OMR 2.02584375 / (1+9%)^3] + [OMR 27.777778 / (1+9%)^3]

= [OMR 1.8375 / 1.09] + [OMR 1.929375 / 1.1881] + [OMR 2.02584375 / 1.295029] + [OMR 27.777778 / 1.295029]

= OMR 1.68577982 + OMR 1.62391634 + OMR 1.56432308 + OMR 21.4495413

= OMR 26.3235605

Therefore, Stock Worth today is OMR 26.32