Question

You are an equities analyst trying to value the equity of the Australian telecoms company Telstra, with ticker TLS. In Australia, listed companies like Telstra tend to pay dividends every 6 months. The payment around August is called the final dividend and the payment around February is called the interim dividend. Both occur annually. Today is mid-March 2015. TLS's last interim dividend of $0.15 was one month ago in mid-February 2015. TLS's last final dividend of $0.15 was seven months ago in mid-August 2014. Judging by TLS's dividend history and prospects, you estimate that the nominal dividend growth rate will be 1% pa. Assume that TLS's total nominal cost of equity is 6% pa. The dividends are nominal cash flows and the inflation rate is 2.5% pa. All rates are quoted as nominal effective annual rates. Assume that each month is exactly one twelfth (1/12) of a year, so you can ignore the number of days in each month. Calculate the current TLS share price.

Answer 1

Dividend Payment Times: Mid-Feb and Mid-Aug, Growth Rate = g = 1% and Cost of Equity = 6 %

Mid-Aug 2014 Dividend = $ 0.15 and Mid-Feb 2015 Dividend = $ 0.15

Present Value of the Mid-Aug Perpetual Dividends at the end of Mid-Aug 2014 = [0.15 x (1.01) / (0.06-0.01)] = $ 3.03

Value of these Dividends at Current Time (Mid-March 2015) = PV1 = 3.03 x (1.06)^(7/12) = $ 3.13476

Present Value of the Mid-Feb Perpetual Dividends at the end of Mid-Feb 2015 = [(0.15 x 1.01)/(0.06-0.01)] = $ 3.03

Value of these Dividends at Current Time (Mid-March 2015) = PV2 = 3.03 x (1.06)^(1/12) = $ 3.04475

Current Price = 3.13476 + 3.04475 = $ 6.17951 ~ $ 6.18