Question

CEPS Group announced today that it will begin paying annual dividends next year. The first dividend will be OMR 0.25 a share. The following dividends will be OMR 0.27, OMR 0.34, OMR 0.45, and OMR 0.52 a share annually for the following 4 years, respectively. After that, dividends are projected to increase by 3 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 7.5 percent?

Answer 1

OMR 9.73

As per dividend discount model, current share price is the sum of present value of future dividends.
Step-1:Present value of dividends of next 5 years
Year	Dividend	Discount factor	Present value
a	b	c=1.075^-a	d=b*c
1	0.25	0.9302	0.23
2	0.27	0.8653	0.23
3	0.34	0.8050	0.27
4	0.45	0.7488	0.34
5	0.52	0.6966	0.36
Total			1.44
Step-2:Present value of dividends after year 5
Present value	=	D5*(1+g)/(Ke-g)*DF5			Where,
	=	8.29			D5	=	0.52
					g	=	3.0%
					Ke	=	7.5%
					DF5	=	0.6966
Step-3:Sum of present value of future dividends
Sum of present value of future dividends	=	1.44	+	8.29
	=	9.73
So,
Price of stock is	9.73