Corporate Finance

Question

Dr. FMS is interested in buying ordinary shares of Online Exam Ltd. Based on

information available to her. He estimates that the company will pay the following

dividends in the next five years.

Year-end Dividend per Share (Rs.)

1 3.5

2 4

3 4

4 4.25

5 5.5

He also estimates that at the end of fifth year, she will be able to sell the shares at Rs. 30.

What is the maximum price he would pay today if her rate of return for this kind of risk is

13%?

Answer 1

One of the many ways of coming up with a stock price is by discounting the dividends to Present Value (PV). In this example we are given 5 dividends and we are not assuming they will be paying this forever. So to to come up with an estimated stock price (What we are willing to pay today) we will do the below math:

3.5 + 4 + 4 + 4.25 + 5.5

(1+ .13) (1+ .13)^2 (1+ .13)^3 (1+ .13)^4 (1+ .13)^5

= ~$14.59 In other words, you will be willing to pay Rs. 14.59 for this stock