Question

CEPS Group announced today that it will begin paying annual dividends next year. The first dividend will be OMR 0.52 a share. The following dividends will be OMR 0.67, OMR 0.72, OMR 0.81, and OMR 0.90 a share annually for the following 4 years, respectively. After that, dividends are projected to increase by 5 percent per year. How much are you willing to pay to buy one share of this stock today if your desired rate of return is 9.5 percent?

Answer 1

Year			Dividend	PV factor @9.5%, 1/(1+r)^time	Dividend * PV factor
1			0.52	0.9132	0.47
2			0.67	0.8340	0.56
3			0.72	0.7617	0.55
4			0.81	0.6956	0.56
5			0.90	0.6352	0.57
5			21.00	0.6352	13.34
				Share price today	16.06
Current Dividend	0.90
Rate of return	9.50%
Growth Rate	5.00%
Share Price at the horizon i.e. T5	=Current Dividend*(1+Growth rate)/(Rate of return-Growth Rate)
Share Price at the horizon i.e. T5	=0.9*(1+0.05)/(0.095-0.05)
Share Price at the horizon i.e. T5	21.00