In: Finance
magnificent miner is a mining startup.due to development costs of its new mine, no dividends will be paid for the first 5 years, after that they pay a $2 divident which wil grow by 10% per annum for the nest five years, remaining contant thereafire, assumming the reuierd return is 12% per annum , what is the share price today?
(b) in five years time
(c) in 10 years time
Expected dividend in each year: | |||||||
D1 | 0 | ||||||
D2 | 0 | ||||||
D3 | 0 | ||||||
D4 | 0 | ||||||
D5 | 0 | ||||||
D6 | 2 | ||||||
D7 | 2+10% | 2.2 | |||||
D8 | 2.2+10% | 2.42 | |||||
D9 | 2.42+10% | 2.66 | |||||
D10 | 2.66+10% | 2.93 | |||||
D11 | 2.93+10% | 3.22 | |||||
D12 | 3.22 | ||||||
Horizon value of D11 = D12 / Required rate of return | |||||||
3.22 / 12% = 26.83 | |||||||
Share price today: | |||||||
Present value of cashflows | |||||||
Year | Cashflows | PVF at 12% | Present value | ||||
1 | 0 | 0.892857 | 0 | ||||
2 | 0 | 0.797194 | 0 | ||||
3 | 0 | 0.71178 | 0 | ||||
4 | 0 | 0.635518 | 0 | ||||
5 | 0 | 0.567427 | 0 | ||||
6 | 2 | 0.506631 | 1.013262 | ||||
7 | 2.2 | 0.452349 | 0.995168 | ||||
8 | 2.42 | 0.403883 | 0.977397 | ||||
9 | 2.66 | 0.36061 | 0.959223 | ||||
10 | 2.93 | 0.321973 | 0.943382 | ||||
11 | 3.22 | 0.292703 | 0.942503 | ||||
11 | 26.83 | 0.292703 | 7.85322 | ||||
Share price today: | 13.68 | ||||||
Req b: | |||||||
Share price after 5 years time: | |||||||
In this case Year-6 will be treated as Year-1 | |||||||
Hence, share price will be as under: | |||||||
Year | Cashflows | PF at 12% | Present vaalue | ||||
1 | 2 | 0.892857 | 1.785714 | ||||
2 | 2.2 | 0.797194 | 1.753827 | ||||
3 | 2.42 | 0.71178 | 1.722508 | ||||
4 | 2.66 | 0.635518 | 1.690478 | ||||
5 | 2.93 | 0.567427 | 1.662561 | ||||
6 | 3.22 | 0.506631 | 1.631352 | ||||
6 | 26.83 | 0.506631 | 13.59291 | ||||
Share price after 5 years time: | 23.84 | ||||||
Req c: | |||||||
Share price after 10 years | |||||||
In this case, Year-11 will be taken as Year-1 | |||||||
Hence, shae price will be: | |||||||
Year | Cashflows | PF at 12% | Present vaalue | ||||
1 | 3.22 | 0.892857 | 2.875 | ||||
1 | 26.83 | 0.892857 | 23.95536 | ||||
Share price after 10 years | 26.83 | ||||||