In: Finance
Calculation of share price if company decided not to invest in new technology:
calculation of dividend for next 4 years
Year | Dividend | |
1 | 6.60 | 6*1.1 |
2 | 7.26 | 6.6*1.1 |
3 | 7.99 | 7.26*1.1 |
4 | 8.78 | 7.99*1.1 |
Calculation of share price at the end of 4th year using dividend discount growth model
Share price = D1 / Ke - g
where,
D1 = next dividend i.e. $8.78 * 1.07 = $9.4
Ke =cost of equity i.e. 17%
g = growth rate i.e. 7%
share price = 9.4/17%-7% = $94
Calculation of share price today
Year | Cash flows | Discount rate @17% | Present value | |
1 | 6.60 | 0.854700855 | 1/(1.17)^1 | $ 5.64 |
2 | 7.26 | 0.730513551 | 1/(1.17)^2 | $ 5.30 |
3 | 7.99 | 0.624370556 | 1/(1.17)^3 | $ 4.99 |
4 | 8.78 | 0.533650048 | 1/(1.17)^4 | $ 4.69 |
4 | 94.00 | 0.533650048 | 1/(1.17)^4 | $ 50.16 |
present value | $ 70.78 |
share price = $70.78
Calculation of share price if company decided to invest in new technology:
Calculation of share price at the end of 5th year using dividend discount growth model
Share price = D1 / Ke - g
where,
D1 = next dividend i.e. $6 * 1.11 = $6.66
Ke =cost of equity i.e. 17%
g = growth rate i.e. 11%
share price = 6.66/17%-11% = $111
Calculation of share price today
Year | Cash flows | Discount rate @17% | Present value | |
1 | 6.00 | 0.854700855 | 1/(1.17)^1 | $ 5.13 |
2 | 6.00 | 0.730513551 | 1/(1.17)^2 | $ 4.38 |
3 | 6.00 | 0.624370556 | 1/(1.17)^3 | $ 3.75 |
4 | 6.00 | 0.533650048 | 1/(1.17)^4 | $ 3.20 |
5 | 6.00 | 0.456111152 | 1/(1.17)^5 | $ 2.74 |
5 | 111.00 | 0.456111152 | 1/(1.17)^5 | $ 50.63 |
present value | $ 69.82 |
share price = $69.82
hence, company should not invest in new technology.