Question #281450

A company is currently paying a dividend of INR 5 per share. The dividend is expected to grow

at a 15 percent rate for three years, then at 10 percent rate for the next three years, after which it is

expected to grow at a 5 percent rate forever. What is the Present Value of the share if the capitalization

rate is 9 percent?

Expert's answer

**Consider this solution**:

Current dividend =INR 5 per share

Growth rate for three year = 15 percent

Growth rate for next three year = 10 percent

Constant growth rate = 5 percent

Required rate of return (r) = 9 percent

"D_1=5\\times(1+0.15)=5.75"

"D_2=5.75\\times(1+0.15)=6.61"

"D_3=6.61\\times(1+0.15)=7.60"

"D_4=7.60\\times(1+0.10)=8.36"

"D_5=8.36\\times(1+0.10)=9.20"

"D_6=9.20\\times(1+0.10)=10.12"

D_{6} will grow at a constant growth rate of 5 percent, Hence

"V_5=\\frac{10.12}{0.09-0.05}=253"

"V_0=\\frac{5.75}{(1.09)}+\\frac{6.61}{(1.09)^2}+\\frac{7.60}{(1.09)^3}+\\frac{8.36}{(1.09)^4}+\\frac{9.20}{(1.09)^5}+\\frac{253}{(1.09)^5}"

"V_0=5.28+5.56+5.87+5.92+5.98+164.43"

"V_0=193.04"

The Present Value of the share is INR 193.04 per share.

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