Question

1 Abenfo Company Ltd is growing quickly. Dividends are expected to grow at a 25 percent rate for the next three years, 15 for the following two years, with the growth rate falling off to a constant 10 percent thereafter. If the required return is 16 percent and the company just paid a GHS3.10 dividend, what is the current share price?   

2. You have been asked by your employers to demonstrate your knowledge in business valuation process, by analyzing Best Capital Micro Finance (BCMF). The company paid a dividend of GHC250,000 this year. The current to shareholders of companies in the same industry as BMS is 12 percent, although it is expected that an additional risk premium of 2 percent will be applicable to BMS, being a smaller and unquoted company.

Required: Compute the expected valuation of BCMF, if:

i. The current level of dividend is expected to continue into the foreseeable future

ii. The dividend is expected to grow at a rate of 4 percent into the foreseeable future

iii. The dividend is expected to grow at 10 percent for the next two years, 5 percent in the following two years and 2 percent afterwards.

Answer 1

1)

Year 1 dividend = 3.1 * 1.25 = 3.875

Year 2 dividend = 3.875 * 1.25 = 4.84375

Year 3 dividend = 4.84375 * 1.25 = 6.054688

Year 4 dividend = 6.054688 * 1.15 = 6.962891

Year 5 dividend = 6.962891 * 1.15 = 8.007324

Year 6 dividend = 8.007324 * 1.10 = 8.808057

Present value at year 5 = D1 / Required rate - grwoth rate

Present value at year 5 = 8.808057 / 0.16 - 0.1

Present value at year 5 = 146.80094

Current share price = 3.875 / ( 1 + 0.16) + 4.84375 / ( 1 + 0.16)² + 6.054688 / ( 1 + 0.16)³ + 6.962891 / ( 1 + 0.16)⁴ + 8.007324 / ( 1 + 0.16)⁵ + 146.80094 / ( 1 + 0.16)⁵

Current share price = $88.37

2)

Required rate of return = 12 + 2 = 14%

The current level of dividend is expected to continue into the foreseeable future:

Valuation of BCMF = 250,000 / 0.14

Valuation of BCMF = $1,785,714.286

The dividend is expected to grow at a rate of 4 percent into the foreseeable future:

Valuation of BCMF = 250,000( 1.04) / 0.14 - 0.04

Valuation of BCMF = $2,600,000

The dividend is expected to grow at 10 percent for the next two years, 5 percent in the following two years and 2 percent afterwards.

Year 1 dividend = 250,000 * 1.1 = 275,000

year 2 dividend = 275,000 * 1.1 = 302,500

year 3 dividend = 302,500 * 1.05 = 317,625

year 4 dividend = 317,625 * 1.05 = 333,506.25

Year 5 dividend = 333,506.25 * 1.02 = 340,176.375

Present value at year 4 = 340,176.375 / 0.14 - 0.02

Present value at year 4 = 2,834,803.125

Value of BCMF = 275,000 / ( 1 + 0.14) + 302,500 / ( 1 + 0.14)² + 317,625 / ( 1 + 0.14)³ + 333,506.25 / ( 1 + 0.14)⁴ + 2,834,803.125 / ( 1 + 0.14)⁴

Value of BCMF = $2,564,273.319