LUATION METHODS ESTION 1 a) It is now January 1, 2014. Last year ABC Company experienced...

Solution:

Q1. A)

It is given that the dividend will be zero in 2014, 2015 and K80 in 2016 and 10% increase in 2017 and 2018 and 8% growth after that .

i)

So dividend will be as follows

2014: 0

2015: 0

2016: K80

2017: 80 * (1+10%) = 88

2018: 88* ( 1+10%) = 96.8

2019 : 96.8 * (1+8%) = 104.544

ii)

In order to calculate the share price we need to find the terminal value after year 2018 and present value of all the dividends

Terminal value = Dividend *( 1+growth) / (required rate of return - growth ) = 96.8 * ( 1+8%) / ( 12% -8%) = 104.544/0.04 = 2613.6

Now we need to discount all the future dividends to get the share price

Price = 0+0+ 56.94+ 55.93 +54.93 + 1483.03= 1650.82

Part B )

In order to calculate the share price we need to find the growth rate .

Six years ago the dividend was 10 and currently it is 13.40

So,

CAGR = (ending value / starting value )^(1/years) - 1

CAGR =( 13.40/10)^(1/6) - 1 = 1.05-1 = 5%

Now we can use dividend discount model to find the share price

Price = D * ( 1 + g) / (r-g) = 13.40 * ( 1+0.05) / ( 0.20-0.05) = 14.07/0.15 = 93.8

I) share price is 93.8

ii) Stock is trading at 110 and calculate price is 93.8 and it is lower than the current price . Hence we will not buy the stock.

D1 TV D2 D3 D4 D5 Price (1 r)(1+r) + (1r)5 (1r)5 (1r)3 (1r)4

80 96.8 0 0 88 Price = (10.12) (0.12)2 (10.12)3(10.12)4 (10.12)5 2613.6 (1 0.12)5