Constant Dividend and Growth
There may be
situation that dividend remains constant for some years and then grow with a
constant rate. The following example can explain the situation.
Example of Constant & Growth
|
Dividend
|
.25 $
|
|
Constant for 5 years
|
|
|
Growth rate after 5 years
|
5 %
|
|
Cost of equity
|
20%
|
Solution
1.
Calculate present value the dividend for 5 Years
C x [ (1+r)-n-1]/i
= .25 (1.2)-5-1/.2
=.25 (2.99)
=.747
2.
Future value of Share
= Do (1+g)/Ke-g
=( .25)(1.05)
( .2-.05)
= .26
.15
=1.733
3.
Discount the future value
= (1.73)(1.2)-5
=.695
It is important to
remember that cost o equity is used for calculating the present value of future
dividend and present value future share value.
4.
Total value of Share Price
|
Present value of
Dividend 5 years
|
$ .74
|
|
Present Value of Share
Value
|
$ .695
|
|
Share Price
|
$ 1.43
|
