Z has 10,000 shares in issue, dividends for the next five years are expected to be constant at 10 cents per share and then grow at 5% per year to perpetuity. Cost of equity is 15%.
How shall the market value be calculated...?
Secondly, dividend growth model assumes that dividend paid is until infinity. Is this correct...?
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Market value of equity
11y ago#1Market value is the present value of future expected dividends discounted at shareholders required rate of return.
So for the first 5 years, you need to discount 10c per year using the 5 year annuity factor at 15%.
Once growth starts you use the dividend growth formula with D = 10c; g = 5%; and R = 15%.
However, because the first dividend will be at time 6 instead of as usual time 1, it means everything is 5 years late and so you need to discount the answer from the growth model formula for 5 years at 15%.
The growth model assumes that shareholders expect the dividend to continue in perpetuity - i.e. to infinity. (It is their expectations that determine the market value).
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