Jim Ltd.’s next dividend will be $4, the dividend is expected to grow at 8% p.a.,...

Jim Ltd.’s next dividend will be $4, the dividend is expected to grow at 8% p.a., for the following 4 years. After that the growth rate in dividends will be 4% per year indefinitely. Required rate of return is 10% p.a. Question: Calculate the current value of Jim Ltd.’s shares

Expert Solution

Calculation of current price:
Year	Cashflows	PVF @10%	Present value
1	4.00	0.909	3.64
2	4.32	0.826	3.57
3	4.67	0.751	3.51
4	5.04	0.683	3.44
5	5.44	0.621	3.38
5	94.29	0.621	58.56
Total			76.09
Current value is $76.09

Working:

Dividend at year 2= 4.00*(1+0.08)= 4.32
Dividend at year 3= 4.32*(1+0.08)= 4.67
Dividend at year 4= 4.67*(1+0.08)= 5.04
Dividend at year 5= 5.04*(1+0.08)= 5.44

Terminal value= Dividend(1+growth)/(return-growth)
=5.44*(1+0.04)/(0.10-0.04)
=5.6576/0.06= 94.29

jeff jeffy answered 1 year ago

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