In: Finance
Kafue Fisheries paid a dividend of K0.58 per share this year. Dividends at the end of each of the next five years are expected to be as follows:
Year 1 K0.70
Year 2 K0.83
Year 3 K0.96
Year 4 K1.09
Year 5 K1.22
After year 5, dividends are expected to grow indefinitely at 10 percent a year. If your required rate of return for Kafue Fisheries’ common stock is 12 percent, what is the most that you would pay per share for Kafue Fisheries today?
Year | Dividends | Discount factor @12% | Present value |
1 | 0.70 | 0.89286 | 0.63 |
2 | 0.83 | 0.79719 | 0.66 |
3 | 0.09 | 0.71178 | 0.06 |
4 | 1.09 | 0.63552 | 0.69 |
5 | 1.22 | 0.56743 | 0.69 |
5 | 67.10 | 0.56743 | 38.07 |
Share price | 40.81 | ||
Discount factor= 1/(1+required rate of return)^year | |||
Share price at the end of 5th year= 5th year dividend*(1+growth rate)/ (required rate-growth rate) | |||
=1.22*1.1/(0.12-0.1)=67.10 |