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Hi John,
Example 7. “Omega plc has just paid a dividend of 20c per share. It is intended that the dividend will remain at 20c for each of the next 2 years and thereafter will grow at 4% per year. The shareholders required rate of return is 15% p.a.”
What if, dividends grew at 4% for the first 2 years and then remained constant thereafter. Please could you solve this?
Kind Regards.
Div for the first two years:
Yr 1 = 20cYr 2 = 20c * 1.04 so is 20.8c
PV Y1= 20c / (1 + 0.15)^1
= 20c / 1.15
= 17.39cY2 = 20.8c / (1 + 0.15)^2
= 20.8c / 1.3225 = 15.71cPV of constant dividend of 40c starting from Year 3:
Perpetuity formula
= 40c / 0.15
= 266.67c (This is the value at Year 2)Now, we need to discount this back to present value:
= 266.67c / 1.3225
= 201.01cPV value per share
= 17.39c + 15.71c + 201.01c = 234.11c
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