You are interested in buying a share that paid its last annual dividend 9 months ago....

You are interested in buying a share that paid its last annual dividend 9 months ago. You can assume that the next dividend payment (3 months from today) will be €1.50. The company anticipates that dividend growth rates will be 5% annually for the next two dividends and 2% thereafter. Assuming the firm’s cost of equity rE is 9%, how much should you pay for the share?

Expert Solution

Present value of all future dividend payments at cost of equity would be the price of Share today.

We can calculate Price of Share when Next dividend (D1) paid with following equation -

Where,

Now, Further discount Present value of share on next dividend date for 3 months to know the value of Share today.

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

Cell reference -

Value of Share today is 24.07

(rounded to two decimals)

Hope this will help, please do comment if you need any further explanation. Your feedback would be appreciated.

jeff jeffy answered 1 year ago

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