Present dividend = D0 = 2.35
Required Rate of return = R = 15%
Growth rate for first 5 years = g1 = 22%
Dividend at end of year 1 = D1 = D0 * (1+g1)
Present Value of dividend D1 = PV (D1) = D1/ (1+ R)
Dividend at end of year 2 = D2 = D0 * (1+g1) ^2
Present Value of dividend D2 = PV (D2) = D2/ (1+ R) ^2
Similarly for t<=5,
Dividend at end of year t = Dt = D0 * (1+g1) ^t
a) Present Value of dividend Dt = PV (Dt) = Dt/ (1+ R) ^t Growth rate after 5 years = g = 6%
b) Price of share at end of year 5 = P5 = (D0 * (1+g1)^5 * (1+g))/ (R-g) Present Value of Price of share at end of year 5 = PV(P5) = P5/(1+R)^5
c) Price of share today = PV(D1) + PV(D2) + PV(D3) + PV(D4) + PV(D5) +PV(D1) + PV (P5) For exact calculation refer to attached excel sheet.
d) Financial Managers consider the following factors while deciding the dividend policy of a company :
a. Type of industry: Industries with consistent revenues adopt a stable dividend policy. Industries with uncertain revenues are conservative in paying out dividends.
b. Age of company: Newer companies retain their earnings to invest back in the business while order ones hand out earnings as dividends.
c. Leverage: Companies with greater leverage pay out less dividends due to debt liabilities.
d. Liquidity: If a company has greater cash reserves and other liquid assets, it can afford to pay greater dividends.
e. Inflation: Higher inflation forces companies to retain more earnings and pay lesser dividends.(Chand, 2015)
Face Value = F
Time period = n
Since coupon is paid semi-annually, m=2
No. of time coupon is paid = m*n
Coupon Rate = 9.875%
Rate of interest = R
a) Market Value of Bond = (C/m)/(R/m) * [1- 1/(1+R/m)^mn] + F / ( 1 + R/m)^mn
b) Bond price increases with decrease in interest rate and vice-versa (Exact calculation in attached excel)
c) If a bond that is trading on the market is currently priced higher than its original price (its par value), it is called a premium bond. Conversely, if a bond that is trading on the market is currently priced lower than its original price (its par value), it is called a discount bond. The price of a bond decreases with increase in interest rate and vice-versa. (Russo, 2014)
d) Bond price increases with decrease in interest rate and vice-versa (Exact calculation in attached excel)
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