Question

Idea has planned to launch itself in Pakistan with multiple stores throughout the country in next 6 years. The company is planning to launch in Lahore and Islamabad in first three years and expecting a growth rate of 12%. Next it would expand itself to Karachi and Multan and expects 6% growth through 4^th to 6^th years. Then company plans to have constant earnings (0% growth) till forever. Currently company has issued dividend of $2(see table) on its shares which are trading in market at a market value of $25. Estimate cost of equity of Idea.

Given dividend is 2.2 and discounting percentage is 8%. Feel free to choose the other value of discounting.

Answer 1

Note: - Since the capital structure of the company is not mentioned, therefore i have assumed it to be zero debt company

Current Price = PV of all Dividends + Terminal Value

Terminal Value = D₆(1 + Terminal Growth Rate) / (k_e - Terminal Growth Rate)
PV of Dividends = D_n/(1+k_e)ⁿ

C F - J D Year Dividend E 0 1 =B1 =E2*((1+$B$2)) G 2 =F2*((1+$B$2)) H 3 =G2*((1+$B$2)) 4 =H2*(1+$B$3) 5 =12*(1+$B$3) K 6 =J2*(1+$B$3) Terminal Value A B 1 Dividend 2 Growth for first 3 years 0.12 3 Growth for first 4-6 years 0.06 4 Forever Growth Rate 0 5 6 Cost of Equity 0.122271698942757 7 Total of PV of Dividends =SUM(F7:K7) 8 9 Current Stock Price 25 =(K2*(1+B4))/(B6-B4) Total Value Present Value =F2+F4 =G2+G4 =H2+H4 =12+14 I=J2+14 =K2+K4 =F6/((1+$B$6)^F1) |=G6/((1+$B$6)^G1) |=H6/((1+$B$6)^H1) |=16/((1+$B$6)^l1) |=J6/((1+$B$6)^J1) |=K6/((1+$B$6)^K1)

B n D E F G H - . K 0 2.0 12.0% Year Dividend 1 2.24 2 2.51 3 2.81 4 2.98 5 3.16 6 3.35 2.0 6.0% 0.0% Terminal Value 27.37 A 1 Dividend 2 Growth for first 3 years 3 Growth for first 4-6 years 4 Forever Growth Rate 5 6 Cost of Equity 7 Total of PV of Dividends 8 9 Current Stock Price 12.23% 2.81 3.16 Total Value Present Value 2.24 2.00 2.51 1.99 2.98 1.88 30.72 15.37 25.00 1.99 1.77 25.0