Question

You are considering investing in JouJou Ltd, a public company that manufactures bottle

openers and other kitchen tools. In considering purchasing shares in JouJou Ltd, you are

utilising your valuation skills to see if the market price is fair. Using the information below, find

the theoretical value of one share of JouJou Ltd and compare it to the current market price of

$42.53:

 A dividend was paid out yesterday of $0.50;

 The next dividend of $0.50 is expected to occur in two years’ time, and this

dividend will be constantly paid every six months for 6 consecutive dividend

payments (this includes the dividend at year 2);

 Thereafter, dividends will grow at 6% p.a. compounded semi‐annually in

perpetuity; and,

 The required rate of return on equity is 8% p.a. compounded quarterly and

all dividends are paid out semi‐annually.

Would you purchase JouJou Ltd? In providing your decision, you may need to state some

assumptions that allow you to compare the market value with the calculated share price.  

Answer 1

Let us calculate the price of the stock 4.5 years from now

Price of Stock = Dividend (1 + growth rate) / (Required rate of return on equity -  growth rate)

Price of Stock = $0.5 (1 + (6% / 2)) / ((8% / 2) - (6% / 2))

Price of Stock 4.5 years from now = $51.5

Price of the stock today

Price of Stock = Dividend / (1 + Required rate of return on equity / Compounding frequency )^{period * Compounding frequency} + Price of Stock 4.5 years from now / (1 + Required rate of return on equity / Compounding frequency)^{period * Compounding frequency}

Price of Stock = $0.5 / (1 + (8% / 2))^{2 * 2} + $0.5 / (1 + (8% / 2))^{2.5 * 2} + $0.5 / (1 + (8% / 2))^{3 * 2} + $0.5 / (1 + (8% / 2))^{3.5 * 2} + $0.5 / (1 + (8% / 2))^{4 * 2} + $0.5 / (1 + (8% / 2))^{4.5 * 2} + $51.5 / (1 + (8% / 2))^{4.5 * 2}

Price of Stock = $0.43 + $0.41 + $0.40 + $0.38 + $0.37 + $0.35 + $36.18

Price of Stock = $38.51

The theoretical calculated share price $38.51 is lower than the current market price of $42.53. I would not purchase this share.