Dividend
Valuation
Business can be valued in term of dividend current
price i.e. discounting the future dividend. This has been explained in detail;
Dividend
Valuation Examples
There are possible situation
1.
Dividend with no Growth
2.
Dividend with Constant Growth
3.
Dividend Growth and then consist Growth
1. 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
2. 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
3. Constant Dividend and Growth
Dividend was paid .25 for 5 years, and then there is
constant growth of 5%, cost of equity is 20%. Calculate the share price
Solution
A. Calculate present value 5 Years
Dividend
C
x [ (1+r)-n-1]/i
=
.25 (1.2)-5-1/.2
=.25
(2.99)
=.747
B. Future & Present Value of Share at Year 5
= Do (1+g)/Ke-g
=(
.25)(1.05)
( .2-.05)
=
.26
.15
=1.733
(Future Value)
=
(1.73) x (1.2)-5
=.695 (Present
Value)
C. Total value of Share Price
|
Present
value of Dividend 5 years
|
$ .74
|
|
Present
Value of Share Value
|
$ .695
|
|
Share Price
(.74+1.43)
|
$ 1.43
|
