0, 0, 0, 0.05, 0.05, 0.05, & years 7 & 8
Year 7: EPS = 0.20(1.04^6) = 0.25306...times payout rate: 0.50 = Dividend 7 "D7" = 0.12653
D8 = D7(1.04) = 0.12653(1.04) = 0.13159
(you could also calculate D8 as EPS= [0.20(1.04^7)]*0.50 = 0.13159
Terminal price (known IN Year 7 based on the Year 8, and forward, dividend...
Use Gordon Growth Model: P7 = D8 / (r - g)
P7 = 0.13159 / (0.15 - 0.04)
= $1.19630, round to $1.20
P0 = the sum of the discounted cash flows...you have 0 cash flows for the first three years...
0.05/1.15^4 + 0.05/1.15^5 + 0.05/1.15^6 + 0.13 / 1.15^7 + 1.20 / 1.15^7
P0 = $0.57506, round to three decimal places: $0.575
Note that I rounded the cash flows to two places after the decimal point before discounting because dividends and prices are paid in real money.
If you leave year 7 dividend and price at 5 places after the decimal point, year 7 cash flow is $1.32783 and Price "P0" = $0.57424, or $0.574
Hayden Ltd intends to make its first dividend payment 4 years(s) from now. It then intends to pay dividends annually thereafter. The company has announced it expects the first three dividends to all be of the magnitude of around 5 cents per share. Subsequent dividends will then be paid out at a set rate of 50% of earnings. Your earnings forecasts for this coming year suggest that $0.20 Earnings per Share (EPS) is the most likely outcome. You are then forecasting EPS growth of around 4% p.a. in perpetuity. What would be your valuation of Hayden Ltd's shares, given you require a 15% p.a. return?
State your answer in dollars to THREE decimal places.
I have attempted this question several times but keep getting stuck. Any help would be greatly appreciated.
