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

**Step 1 - Dividends for the explicit period @ 4% growth
rate**

Year | Dividend |

1 | 2.55 |

2 | 2.65 |

3 | 2.76 |

**Step 2 - Stock Price at the end of year 3
(S3)**

S3 = Present value of all the dividends after 3rd year discounted at 11%

S3 = 3.5 / 0.11 = 31.82

**Step 3 - Present value of explicit period dividend and
S3**

Year | Particulars | Dividend | Present Value factor @11% | Present Value |

1 | Dividend | 2.55 | 0.90 | 2.30 |

2 | Dividend | 2.65 | 0.81 | 2.15 |

3 | Dividend | 2.76 | 0.73 | 2.02 |

3 | Stock Price (S3) | 31.82 | 0.73 | 23.27 |

Stock Price today | 29.73 |

Stock Price today should be worth OMR 29.73

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