Common
Stock Valuation Examples
There are possible situation
1.
Dividend with no Growth
2.
Dividend with Constant Growth
3.
Dividend Growth and then consist Growth
Dividend
with no Growth Example
ABC Company is paying dividend $ $ 2 and cost of equity
of the company is 12%. Then share price may be calculated as under
Share
price = Dividend/Cost of equity
=
$ 2/.12
=
$ 16.667
Dividend with
Constant Growth Example
XYZ Company is paying dividend $ 2 with constant growth
rate of 4 % .cost of equity of the company is 12%. Then share price may be
calculated as under
Share
Price = Do (1+g)
Ke – g
g
= Dividend growth Rate
Ke
= Cost of Equity
Do
=Current Dividend
=
$ 2 (1+.04)
12% - 4%
=
2.08
8%
=
$ 26
Dividend with
abnormal Growth & normal Growth
A
& Co paid a dividend is $ 5. Expected growth for two year is 8 % and
thereafter the growth will be normal i.e. 5%. Cost of equity is 12%. Calculate
the share price
|
D1
|
5 x ( 1.08)1
|
5.4
|
|
D2
|
5 x (1.08)2
|
5.83
|
|
D3
|
5.83 x (1.05)
|
6.12
|
Present
value of D3 may be calculated
=
D3/ (12% - 5%)
=6.12/6%
=102
Discount
the dividend and share price at year end 3
|
D1
|
5.4 (1+.12)-1
|
4.82
|
|
D2
|
5.83 (1+.12)-2
|
4.64
|
|
D3
|
6.12 (1+.12)-3
|
4.35
|
|
P3
|
102 (1+.12)-3
|
72.6
|
|
Total
Share price (Po)
|
|
86.414
|
