- 10 Marks
Question
Oliso Ghana Ltd paid a dividend of GH¢120 per share two years ago. In the previous and current year, dividend grew by 10% per annum. Starting from next year, dividend is projected to grow by 15% for the next three years and then 10% for another three years and finally settling at 12% forever. The investors expect 20% returns.
Required:
i) Calculate the value of a share in cedis for Oliso Ghana Ltd. (8 marks)
ii) If an investor holds 1,500 shares of the company, what will be the total value in cedis? (2 marks)
Answer
i) Calculation of value of a share:
- Dividend two years ago: GH¢120
- Growth rate over the last 2 years: 10%
- Current dividend level:
Dividend projections for the next 6 years:
| Year | Dividend | Growth Rate | DF @ 20% | Present Value |
|---|---|---|---|---|
| 1 | 167 | 15% | 0.833 | 139.11 |
| 2 | 192 | 15% | 0.694 | 133.25 |
| 3 | 221 | 15% | 0.579 | 127.96 |
| 4 | 243 | 10% | 0.482 | 117.12 |
| 5 | 267 | 10% | 0.402 | 107.33 |
| 6 | 294 | 10% | 0.335 | 98.49 |
| Total PV of Dividends | 723.26 |
Calculation of price at period :
Present value of price at period 6:
PV6=4,116×0.335=GH¢1,379
Total value today:
Total Value = 723.26 + 1,379 = GH¢2,102.26
ii) Value of 1,500 shares today:
- Tags: Discounted Cash Flow, Dividend valuation, Growth rates, Stock valuation
- Level: Level 2
- Topic: Discounted cash flow, Dividend Policy
- Series: MAR 2023
- Uploader: Theophilus