Homework Answers
Part 1
| Year | Growth Rate of dividend | Dividend | PV @ 12% | Present Value |
| 1 | 10 | 2.20 | 0.893 | 1.96 |
| 2 | 10 | 2.42 | 0.797 | 1.93 |
| 3 | 10 | 2.66 | 0.712 | 1.89 |
| 4 | 9 | 2.90 | 0.636 | 1.84 |
| 5 | 8 | 3.13 | 0.567 | 1.78 |
| 6 | 7 | 3.35 | 0.507 | 1.70 |
| Present Value of dividends | 11.11 | |||
Terminal Value of share = [ Dividend of year 6 * (1 + growth rate) ] / [Rate of return - growth rate]
= [ 1.7 * ( 1 + 0.07 ) ] / ( 0.12 - 0.07 )
= (1.7 * 1.07) / 0.05
= 1.819 / 0.05
= 36.38
Present Value of terminal value of share = terminal value of share * PVIF (12%, 6 year)
= 36.38 * 0.507
= 18.44
Thus stock price = PV of dividends + PV of terminal Value of share
= 11.11 + 18.44
= $29.55 or $30 (rounded off)
Part 2
Calculation of Earnings Per Share:
Dividend for year 6 (as calculated in part 1) = $ 1.70
Dividend payout ratio = 80% (given)
Earnings Per Share = Dividend paid / Dividend payout ratio
= 1.70 / 0.80
= $ 2.125
PE Ratio = Market Price per Share / Earnings Per Share
Thus
25 = Market Price per Share / 2.125
Market Price per Share = 25 * 2.125
= $53.125 or $53 (rounded off)
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