Question

Canadian-based mining company El Dorado Gold​ (EGO) suspended its dividend in March 2016 as a result of declining gold prices and delays in obtaining permits for its mines in Greece. Suppose you expect EGO to resume paying annual dividends in two years​ time, with a dividend of ​$0.35 per​ share, growing by 2.6 % per year. If​ EGO's equity cost of capital is 9.6 %​, what is the value of a share of EGO​ today?

Answer 1

Following is the equation for calculating the price of the stock at time 1 using the given information:

$P_{1} = \frac{D_{2} }{r-g}$

Here P₁ is the price, D₂ is the dividend for year 2, g= growth rate & r = cost of equity

$P_{1} = \frac{0.35 }{0.096-0.026}$

$P{1} = \$ 4.605263158$

Now to find P₀ ie the price today, we need to discount the above calculated price for one period

$\frac{P{1} }{1+r}= \frac{\$ 4.605263158}{1.096}$

$P{0} = \$ 4.201882443$

So the price today is $4.20 rounded to two decimal places