magnificent miner is a mining startup.due to development costs
of its new mine, no dividends will...
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Finance
magnificent miner is a mining startup.due to development costsof its new mine, no dividends will be paid for the first 5 years,after that they pay a $2 divident which wil grow by 10% per annumfor the nest five years, remaining contant thereafire, assummingthe reuierd return is 12% per annum , what is the share pricetoday?
(b) in five years time
(c) in 10 years time
Answer & Explanation
Solved by verified expert
4.4 Ratings (741 Votes)
Expected
dividend in each year:
D1
0
D2
0
D3
0
D4
0
D5
0
D6
2
D7
2+10%
2.2
D8
2.2+10%
2.42
D9
2.42+10%
2.66
D10
2.66+10%
2.93
D11
2.93+10%
3.22
D12
3.22
Horizon
value of D11 = D12 / Required rate of return
3.22 / 12%
= 26.83
Share
price today:
Present
value of cashflows
Year
Cashflows
PVF at
12%
Present
value
1
0
0.892857
0
2
0
0.797194
0
3
0
0.71178
0
4
0
0.635518
0
5
0
0.567427
0
6
2
0.506631
1.013262
7
2.2
0.452349
0.995168
8
2.42
0.403883
0.977397
9
2.66
0.36061
0.959223
10
2.93
0.321973
0.943382
11
3.22
0.292703
0.942503
11
26.83
0.292703
7.85322
Share
price today:
13.68
Req
b:
Share
price after 5 years time:
In this
case Year-6 will be treated as Year-1
Hence,
share price will be as under:
Year
Cashflows
PF at
12%
Present
vaalue
1
2
0.892857
1.785714
2
2.2
0.797194
1.753827
3
2.42
0.71178
1.722508
4
2.66
0.635518
1.690478
5
2.93
0.567427
1.662561
6
3.22
0.506631
1.631352
6
26.83
0.506631
13.59291
Share
price after 5 years time:
23.84
Req
c:
Share
price after 10 years
In this
case, Year-11 will be taken as Year-1
Hence,
shae price will be:
Year
Cashflows
PF at
12%
Present
vaalue
1
3.22
0.892857
2.875
1
26.83
0.892857
23.95536
Share
price after 10 years
26.83
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