Question

JOKAMS ltd has started producing new learning software. The popularity of the product is such that it expects to pay its shareholders dividend which grows at 20% for the first three years. After three years most of the population will have acquired the software and dividends are expected to grow at a steady 5% a year forever. The current annual dividend is $150.00 and investors required a return of 15%. What is the value of the company’s share?

Answer 1

JOKAMS Ltd's current dividend = $ 150

first three years growth rate =  20 %

growth rate after three year = 5%

Required rate of return (ke) = 12%

year	0	1	2	3
dividend ($)	150	180	216	259.20

Value of company's share = D0 * (1 + g) / (ke - g)

Where

D0 = Dividend of current year ($ 259.20)

g = growth Rate ( 5%)

ke = cost of equity ( 12%)

Value of company's share (after three year) = $ 259.20 (1+0.05) / (0.12 -0.05)

= $ 272.16 / 0.07

= $ 3888

Here value of company's share after three year is $ 3888. if we want to calculate value of company's share immediatly then we have to use current years dividend i.e $ 150