Question

TX paid $7m ordinary dividend for its 4m outstanding shares. The company decides to pay no dividend next year but 4 per cent more dividend in the second next year. The same growth in dividend is expected to continue forever. If the market expects 13 per cent return from this company, what would be the value for DTX share today?

Answer 1

Given about DTX company,

Last dividends paid = $7 million

Number of outstanding share = $4 million

So, Dividend per share = dividends/number of outstanding share = 7/4 = $1.75

So, D0 = $1.75

next year no dividend will be paid

So, D1 = $0

Dividend in year 2 is 4% more than D0

=> D2 = D0*1.04 = 1.75*1.04 = $1.82

Growth rate g = 4% forever

market expected return r = 13%

Price of the stock at year 1 can be calculated using constant growth model

P1 = D2/(r - g) = 1.82/(0.13-0.04) = $20.22

So current stock value = P1/(1+r) = 20.22/1.13 = $17.90

So, the value for DTX share today is $17.90