Question

CEPS Group just paid an annual dividend of OMR 2.45 a share. The firm plans to increase the annual dividends by 4 percent over the next 3 years. After that time, the dividends will be held constant at OMR 3.5 per share. What is this stock worth today at a 11 percent discount rate?

Answer 1

Given about CEPS group,

Last dividend paid D0 = OMR 2.45

firm plans to increase the annual dividends by 4 percent over the next 3 years

=> Dividend next year D1 = D0*1.04 = 2.45*1.04 = OMR 2.548

D2 = D1*1.04 = 2.548*1.04 = OMR 2.6499

D3 = D2*1.04 = 2.6499*1.04 = OMR 2.7559

there after dividend is fixed at OMR 3.5

So, D4 = OMR 3.5

discount rate d = 11%

So, stock price at year 3, using perpetual model is

P3 = D4/d = 3.5/0.11 = OMR 31.8182

stock price today is sum of PV of future dividends and P3 discounted at d

=> P0 = D1/(1+d) + D2/(1+d)^2 + D3/(1+d)^3 + P3/(1+d)^3

=> P0 = 2.548/1.11 + 2.6499/1.11^2 + 2.7559/1.11^3 + 31.8182/1.11^3 = OMR 29.73

So, Stock is worth OMR 29.73 today