Question

Follow up question to the recommendations made to Jerry , how do I get to $44.96? I'm confused

Answer 1

Answer:

Dividend last paid in 2019 = $3.50

It is given that from year 2020 to 2022 (for 3 years) the growth rate is 15% and thereafter there will be constant growth rate of 8%

Hence:

Dividend in year 2020 = 3.50 * (1 + 15%) = $4.025

Dividend in year 2021 = 4.025 * (1 + 15%) = $4.62875

Dividend in year 2022 = 4.62875 * (1 + 15%) = $5.3230625

Dividend in year 2023 = 5.3230625 * (1 + 8%) = $5.7489075

As dividend growth rate will constant from 2023 onward at 8%, we need to calculate horizon value of share at the end of 2022

Horizon value at the end of year 2022 = Dividend in 2023 / (Required return - Constant growth rate)

= 5.7489075 / (18% - 8%)

= $57.489075

Now we calculate present values of these cash flows (dividends for 2020, 2021, 2022 and horizon value of share at the end of 2022)

Value of share = Dividend 2020 / (1 + 18%) + Dividend 2021 / (1 + 18%) ² + Dividend 2022 / (1 + 18%) ³ + Horizon value / (1 + 18%) ³

= 4.025 / (1 + 18%) + 4.62875 / (1 +18%) ² + 5.3230625 / (1 + 18%) ³ + 57.489075 / (1 + 18%) ³

= $44.96

Value of share = $44.96