INVESTMENT ANALYSIS – AREAS OF CONCENTRATION (TOPIC: (COMMON STOCK VALUATION-SINGLE STAGE MODEL-Example2)

For comments, observations, questions and answers, email; theotherwomaninmarriage@gmail.com 

The common stock of M & M Corporation is currently selling for N60 per share, dividend per share have grown from N1.5k to the current level of N4 over the past 10 years.  This dividend growth is expected to continue in the future.  What is the required rate of return for the M & M Corporation.

SOLUTION:

k = Do (1 + g)  + g

              Po    

Where:

K = The required rate of return

Do=Current Dividend per share

1 = is constant  

g = Growth rate

 k = Do (1 + g)  + g

              Po    

Note that g here is (future value) 1/n

                           ( Present value)      - 1

g=  4  

    1.5  raised to power 1/10 – 1. See the formula above.

g=  0.1031

k = 4 (1 + 0.1031)  + 0.1031

              60

k = 0.17664

k = 17.7%

   

Explanation:

g has its own formula in this question.  That is, you have to solve for g before you can substitute it in the main formula.  That is why we have;

                             (future value) 1/n

                            (Present value)      - 1

 

Now read the question again.  The future value is 4 while the present value is 1.5.  That is how we got:

g=  4

    1.5

Then you have to raised the answer you get to 1/n.  n is 10 years.  1/10 will give you something like 0.1.  now 4/1.5 raised to 0.1 – 1. Will give you 0.1031.

Then we can now go back to the main formula and solve since we have gotten the g we are looking for.  So, substitute g figures any where there g.

If you don’t understand, you can always call me for the steps or workings of this question.