Question

Equity analysts predict Angel will pay its first annual dividend of $0.02 in 2021. The dividend in 2022 is expected to be 25% larger than the 2021 dividend as the company’s cash flows grow substantially. Beyond 2022 the dividend is expected to increase by 4% p.a. forever. If the required return is 12%, then what is the fair value of an Angel share today, in 2019?

Answer 1

	Required rate=	12.00%
Year	Previous year dividend	Dividend growth rate	Dividend current year	Horizon value	Total Value	Discount factor	Discounted value
1	0	0.00%	0		0	1.12	0
2	0	0.00%	0.02		0.02	1.2544	0.01594
3	0.02	25.00%	0.025	0.325	0.35	1.404928	0.24912
	Long term growth rate (given)=	4.00%			Value of Stock =	Sum of discounted value =	0.27

Where
Current dividend =Previous year dividend*(1+growth rate)^corresponding year
Unless dividend for the year provided
Total value = Dividend + horizon value (only for last year)
Horizon value = Dividend Current year 3 *(1+long term growth rate)/( Required rate-long term growth rate)
Discount factor=(1+ Required rate)^corresponding period
Discounted value=total value/discount factor

Price = PV of dividends + PV of horizon value

=(Dividend year 2/(1+required rate)^2+Dividend year 2*(1+high growth rate)/(1+required date)^3)+ (Dividend year 2*(1+high growth rate) *(1+ long term growth rate)/(required rate-long term growth rate))/(1+required date)^3)

=(0.02/(1+0.12)^2+0.02*(1+0.25)/(1+0.12)^3)+(0.02*(1+0.25)*(1+0.04)/(0.12-0.04))/(1+0.12)^3)

=0.265