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