04-12-2010, 05:14 PM
Dear Zeeshan,
Dividend Growth rate has to be ascertained using standard formula of compound interest, since cost of capital is given and the same will have to be used for discounting purpose, using the following Formula;
{(D1/D0) ^ -1/n} â 1
[{(30,000/25,000)^ -1/6) -1]*100
Growth Rate = 3%
Using dividend growth model for share price, the following formula is to be used;
[{Dividend Per Share * (1+g)}/(Ke - g)]
[{1.5*1.02}/5%-3%]
Share price =77.25.
Alternatively, the same answer could have been arrived at using different tactics as well;
Total dividend paid last year------------------------- 30,000
Current Dividend should be( using growth rate of 5%)--- 30,900 (30000*1.03)
Current Dividend / Number of shares outstanding = 30,900/20000* = 1.545
Dividend per share 1.545.
Using current dividend of Rs. 1.545 per share;
1.545/0.02 (Ke â g) = 77.25.
Still, there are some other alternatives to arrive at the same result, however, in my opinion, these are sufficed enough unless others are asked.
Best Regards,
Faisal.
*Since Total dividend has been given as Rs. 30,000 and dividend per share has also been given as Rs. 1.5 per share, hence number of shares should be 30,000/1.5 =20,000 shares.
