Question

#10) BRIDGEPORT Ltd. had earnings per share of $4 as of December 31, 2022, but paid no dividends. Earnings were expected to grow at 15.3 percent per year for the following five years. BRIDGEPORT Ltd. will start paying dividends for the first time on December 31, 2027, distributing 50 percent of its earnings to shareholders. Earnings growth will be 5 percent per year for the next six years (that is, from January 1, 2028, through to December 31, 2033). Starting on December 31, 2033, BRIDGEPORT Ltd. will begin to pay out 80 percent of its earnings in dividends and earnings growth will stabilize at 2 percent per year in perpetuity.The required rate of return on BRIDGEPORT stock is 10 percent.

What should be the current share price of BRIDGEPORT? (Round intermediate calculations to 6 decimal places, e.g. 15.612125 and the final answer to 2 decimal places, e.g. 15.61.)

Answer 1

Terminal value at the end 2033 =

D2034 = Dividend at 2034

Ke = required rate of return = 10% or 0.10

g = terminal growth rate = 2% or 0.02

hence,

Terminal value at the end 2033 =

current share price of BRIDGEPORT= PV if the dividend+PV of the Terminal value

		A		B		A*B
	Year	Cash flow		PVF@10%		Present value of the cahs flow
1	31-12-2023	0.0000	Dividend	0.9090909091	=1/(1.1)^1	0.0000
2	31-12-2024	0.0000	Dividend	0.826446281	=1/(1.1)^2	0.0000
3	31-12-2025	0.0000	Dividend	0.7513148009	=1/(1.1)^3	0.0000
4	31-12-2026	0.0000	Dividend	0.6830134554	=1/(1.1)^4	0.0000
5	31-12-2027	4.0755	Dividend	0.6209213231	=1/(1.1)^5	2.5305
6	31-12-2028	4.2792	Dividend	0.5644739301	=1/(1.1)^6	2.4155
7	31-12-2029	4.4932	Dividend	0.5131581182	=1/(1.1)^7	2.3057
8	31-12-2030	4.7179	Dividend	0.4665073802	=1/(1.1)^8	2.2009
9	31-12-2031	4.9537	Dividend	0.4240976184	=1/(1.1)^9	2.1009
10	31-12-2032	5.2014	Dividend	0.3855432894	=1/(1.1)^10	2.0054
11	31-12-2033	8.7384	Dividend	0.3504938995	=1/(1.1)^11	3.0628
11	31-12-2033	111.4147	Terminal value	0.3504938995	=1/(1.1)^11	39.0502
					Current price	55.67

current share price of BRIDGEPORT= $55.67