Constant Dividend and future Sale
There may be
situation where the constant dividend is offered and share expected to be sold
in future. This situation can be better explained by following example
Example
|
Dividend
|
.4 for year
|
|
Growth after 4 years
|
4%
|
|
Cost of equity
|
18%
|
|
Sale Price
|
$ 5
|
Solution
1.
Calculate present value of Dividend
C x [ (1+r)-n-1]/i
= .4 (1.18)-5-1/.18
=.4 (3.12)
=1.25
2.
Calculate the future Value of Share Price
= Do (1+g)/Ke-g
=( .4)(1.04)
( .18-.04)
= .416
.14
=2.97
3.
Discount the future Share price
(2.97)(1.18)-5
= 1.298
4. Discount the future Disposal
($ 2) x ( 1.18)-5
= $ 2 x .437
= .87
5. Present Share Price
|
Present value of future
Dividend
|
1.25
|
|
Present Value Share
|
1.29
|
|
Present Value of
Disposal
|
.87
|
|
Total Present Value
Share
|
3.41
|
|
|
|
