Question

QUESTION 9

Risk Limited's dividend on 30 June 2009 was R2,20 per share. Due to the uncertainty in the exchange market, they expect a zero growth rate in dividends for the next two years. Thereafter planned expansions will cause the dividends to grow by 15 percent (15%) per year for three years and the growth will then stabilize on five percent (5%) per year for the foreseeable future. Shares with similar risk, currently have a 12 percent (12%) annual return. Calculate what you will pay currently per share, if you want to invest in the company. Show all your calculations.

Answer 1

Solution:

Current Dividend=R 2,20 per share

Cost of Equity(Discount Rate)=12% or 0.12

Statement showing dividend for different year

Year		Dividend(R)[Previous year dividend*(1+growth rate)]
0	D0	2,20
1	D1	2,20(1+0)=2,20
2	D2	2,20(1+0)=2,20
3	D3	2,20(1+0.15)=2,53
4	D4	2,53(1+0.15)=2,90.95
5	D5	290.95(1+0.15)=3,34.60
6	D6	3,34.60(1+0.5)=3,51.32

we have to find the Terminal value at year end 5 because growth rate stabilise after year 5

Terminal Value=D6/Cost of equity-Growth rate

=351.32/.012-0.05

=R5018.86

Now we have to calculate present value of all dividends and terminal value

Present Value=Dividend of respective year*Present value factor @12% for respective yeasr+Terminal value*Present value factor @12%

=(2,20*.893)+(2,20*.797)+(2,53*.712)+(2,90.95*.636)+(3,34.60*.567)+(5018.86*.567)

=196.46+175.34+180.14+185.04+189.72+2845.70

=3772.40

Thus the price of share investro willing to pay is R37,72.40

However if the financial year end in december,the we have to furthe discount the above amount for 6 month in order to know the current price of share.Price is computed as follows

Discount rate=0.12/2=.06

=3772.40*.943

=R3557.40