Question

Ratana is thinking of buying shares in Deniliquin Forestry Limited. She estimates that the required rate of return for this company is 10% per annum. She has forecast the Income Statement and Balance Sheet for the next four years, and estimates that the company can pay the following dividends:

Year 1: Nil

Year 2: 12 cents per share

Year 3: 15 cents per share

Year 4: 21 cents per share.

Longer term Ratana estimates that dividends can grow at 3% per annum. Based on these assumptions, one share in Deniliquin Forestry is worth approximately

Answer 1

P4 = D4*(1+g)/(r-g)

= 0.21 * 1.03/(0.10 - 0.03)

= 3.09

Thus worth of Deniliquin Forestry's share = D1/(1+r) + D2/(1+r)^2 + D3/(1+r)^3 + D4/(1+r)^4 + P4/(1+r)^4

Year (n)		Amount	1+r	PV = Amount/(1+r)^n
1	D1	-	1.10	-
2	D2	0.12		0.10
3	D3	0.15		0.11
4	D4	0.21		0.14
4	P4	3.09		2.11
			Total	2.47

Thus  one share in Deniliquin Forestry is worth $2.47