NEED HELP! Growth rate and M.V of share

[Qureshi Muhammad Zeeshan]

Dividends from the project in year 2000, 2001, 2002, 2003, 2004, 2005 and 2006
are Rs 25,000, Rs. 26,500, Rs. 28,000, Rs. 35,000, Rs. 27,500, Rs. 29,700 and Rs.
30,000 respectively. The company’s cost of equity (Ke) 5% and Dividend per share for
the year 2005 is Rs. 1.5
Required
Calculate Growth rate in dividend and Market value of share for 2006

plz show working if possible

[faisal_desperado]

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} – 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 – 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.