corhig co

CORHIG CO (JUNE 2012 MODIFIED) Corhig Co is a company that is listed on a major stock exchange. The company has struggled to maintain profitability in the last two years due to poor economic conditions in its home country and as a consequence it has decided not to pay a dividend in the current year.However, there are now clear signs of economic recovery and Corhig Co is optimistic that payment of dividends can be resumed in the future. Forecast financial information relatin to the company is as follows: Year 1 2 3 Earnings ($000) 3,000 3,600 4,300 Dividends ($000) nil 500 1,000 The company is optimistic that earnings and dividends will increase after Year 3 at a constant annual rate of 3% per year.Corhig Co currently has an equity beta of 1.6. The risk?free rate of return is 4% per year and the equity risk premium is 5% per year. The current average price/earnings ratio of listed companies similar to Corhig Co is 5 times. (b) Calculate the current cost of equity of Corhig Co and, using this value, calculate the value of the company using the dividend valuation model. (6 marks) Years 2 and 3. PV of year 2 dividend = 500,000/1.122 = $398,597 PV of year 3 dividend = 1,000,000/1.123 = $711,780 Year 3 PV of dividends after year 3 = (1,000,000 × 1.03)/(0.12 – 0.03) = $11,444,444 Year 0 PV of these dividends = 11,444,444/1.123 = $8,145,929 sir, how is this present value calculated in this part ?