Question

KCP suspended its dividend at the start of 2015 and as of 2018, has not reinstated its dividend. Suppose you do not expect KCP to resume paying dividends until 2020. You expect KCP's dividend in July 2021 to be 1 (paid annually), and you expect it to grow by 5% per year thereafter. If KCP's equity cost of capital (discount rate) is 11%, what is the value of a share of KCP at the end of 2018?

Answer 1

Using Gordon growth model, price at the end of year 2020 would be

P(2020) = Div(2021) / (k -g)

where, Dividend for year 2021 = 1

k , cost of capital = 11%

g, perpetual growth = 5%

P(2020) = 1 / ( 0.11 = 0.05)

P(2020) = 1/ 0.06

P(2020) = 16.67

now, the price at 2020 needs to be discounted to year 2018. Number of years = 2

P(2018) = P(2020) / (1 + k) ^t

P(2018) = 16.67 / ( 1+ 0.11) ²

P(2018) = 16.67 / 1.2321

P(2018) = $13.53

Value of a share at the end f year 2018 will be $13.53