ABC Ltd just announced that it is not expected to pay any dividends for the next 4 years. Then the expected dividend per share found in part (a) will be paid to shareholders, which will continue to grow at a constant rate of 20% per annum for another 2 years. After that, the dividend will grow indefinitely at 5% per annum. If the rate of return is 9% per annum, what is the current value of a share in ABC Ltd?
Solution:-
Let Assume Dividend is part A is 0.30 per share.
To Calculate Current Value of Share-
DPS | |
Year | Dividend |
1 | 0.00 |
2 | 0.00 |
3 | 0.00 |
4 | 0.00 |
5 | 0.30 |
6 | 0.36 |
7 | 0.432 |
8 | 0.454 |
Terminal Value at the end of Year 7 =
Terminal Value =
Terminal Value = $11.35
Current Value of Stock =
Current Value of Stock =
Current Value of Stock = $6.85
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