Question

Earnings Per Share is $5.25, and over the next 5 years they expect a payout ratio of 20% and ROE of 15%. During this high-growth period, beta is estimated at 1.20, with a risk-free rate of 1.0% and a market risk premium of 5%. At the end of the 5-year high growth period, estimate their stable beta will be 1.05, with ROE of 12% and growth of 2.0%. Risk-free rate and market risk premium stay the same. Determine the per-share value for the company with calculations.

Answer 1

A	B	C	D	E	F	G	H	I	J	K	L	M
2
3		Share value will be the present value of future dividends.
4		EPS	$5.25
5		Dividends Payout ratio	20%
6		Terminal Growth Rate	2%
7			During high growth period	After high growth period
8		ROE	15%	12%
9		Beta	1.2	1.05
10		Risk free rate	1%	1%
11		Market risk premium	5%	5%
12
13		As Per CAPM, required return can be calculated as:
14		r(E) = rf + β*(rm-rf)
15
16			During high growth period	After high growth period
17		Required Return	7.00%	6.25%	=E10+E9*E11
18
19		Dividends Per Year can be calculated as follows:
20		Year	0	1	2	3	4	5	6
21		EPS		$5.25	$5.88	$6.59	$7.38	$8.26	$9.25	=H21+H24*$D$8
22		Dividend Payout		20%	20%	20%	20%	20%	20%	=H22
23		Dividend Paid		$1.05	$1.18	$1.32	$1.48	$1.65	$1.85	=I21*I22
24		Retained Earnings		$4.20	$4.70	$5.27	$5.90	$6.61	$7.40	=I21-I23
25
26		Thus the dividends paid will be:
27		Year	0	1	2	3	4	5	6
28		Dividends Paid		$1.05	$1.18	$1.32	$1.48	$1.65	$1.85
29		Growth rate			12.0%	12.0%	12.0%	12.0%	2.0%
30		Required Return		7.00%	7.00%	7.00%	7.00%	7.00%	6.25%
31		Terminal value = DIV6/(r-g)						43.54021		=J28/(J30-J29)
32		Present value of dividends		$0.98	$1.03	$1.08	$1.13	$32.22		=(I31+I28)/((1+I30)^I27)
33		Price of share at Year 0	$36.43	=SUM(E32:I32)
34
35		Hence value of share is	$36.43
36