Unit 5b Share Valuation.pdf (CFM22A2)

Unit 5b Share Valuation

Tutorials
T6.1

Solution:

Zero dividend growth model. As D0 = D1 = D2 = …= D , we can use the following equation


𝐷
𝑟𝑠
𝐷 2.50
=
𝑟𝑠 0.20


= R 12.50


T6.2

Solutions:

Variable dividend growth model; which requires the use of 5 steps.

Step 1: Calculate the dividends during the supernormal growth period
Year 1: D1 = D0(1 + g1) = 1,5 x (1 + 0,20) = 1,8


Year 2: D2 = D1(1 + g2) = 1,8 x (1 + 0,13) = 2,03


Year 3: D3 = D2(1 + g2) = 2,03 x (1 + 0,13) = 2,29


Year 4: D4 = D3(1 + g2) = 2,29 x (1 + 0,13) = 2,59


Step 2: Calculate the present value (PV) of supernormal growth dividends


FV = 1,8; n = 1; i = 16; comp PV = 1,55

FV = 2,03; n = 2; i = 16; comp PV = 1,51

FV = 2,29; n = 3; i = 16; comp PV = 1,47

FV = 2,59 n = 4; i = 16; comp PV = 1,43