Question

SIMON Ltd. had earnings per share of $5 as of December 31, 2011, but paid no dividends. Earnings were expected to grow at 15 percent per year for the following five years. SIMON Ltd. will start paying dividends for the first time on December 31, 2016, distributing 50 percent of its earnings to shareholders. Earnings growth will be 6 percent per year for the next six years (that is from January 1, 2017, through to December 31, 2022). Starting on December 31, 2022, SIMON Ltd. will begin to pay out 80 percent of its earnings in dividends and earnings growth will stabilize at 2 percent per year in perpetuity. The required rate of return on SIMON stock is 10 percent. What should be the current share price of SIMON?

Answer 1

Year	Earnings	Dividend	Price
2011	$      5.00	$          -
2012	$      5.75	$          -
2013	$      6.61	$          -
2014	$      7.60	$          -
2015	$      8.75	$          -
2016	$   10.06	$      5.03
2017	$   10.66	$      5.33
2018	$   11.30	$      5.65
2019	$   11.98	$      5.99
2020	$   12.70	$      6.35
2021	$   13.46	$      6.73
2022	$   14.27	$   11.41	$ 145.51
2023	$   14.55	$   11.64

Forecast the earnings and dividends given the growth rates and payout ratios.

Price in year 2022, P22 = D23 / (r - g) = 11.64 / (10% - 2%) = $145.51

Price today is the present value of all future dividends and the terminal price

P = 5.03 / (1 + 10%)^5 + 5.33 / 1.1^6 + .... + (11.41 + 145.51) / 1.1^11 = $72.11 is the current share price.