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A company company has just paid dividend of $0.23 per share.
Shareholders are expecting the dividend to remain at $0.23 for the next year, but to increase at an average rate of 3% per annum thereafter.Shareholders required rate of return is 12% and the rate of corporation tax is 25%
What will be the current market value per share ( to the nearest cent)
Use the dividend growth formula with Do = 23c; g = 3%; Re = 12%.
However, this would only give the market value is the growth started immediately. Since it starts in 1 years time, it will give a value in 1 years time.
So then use the basic rule that market value is present value of future dividends. In 1 years time there is a dividend of 23c, plus the value given by the growth model formula (as above).
So take the total of the two and discount for one year at 12%.The tax is, of course, irrelevant.
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