12) Sime Natural Cosmetics Ltd. has a dividend yield of 2 percent based on the c
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Question
12) Sime Natural Cosmetics Ltd. has a dividend yield of 2 percent based on the current dividend and a mature phase dividend growth rate of 5 percent a year. The current dividend growth rate is 10 percent a year, but the growth rate is expected to decline linearly to its mature phase value during the next six years.
A. If Sime Natural Cosmetics is fairly priced in the marketplace, what is the expected rate of return on its shares?
B. If Sime were in its mature growth phase right now, would its expected return be higher or lower, holding all other facts constant?
Explanation / Answer
A. Using the H-Model expression formula Where, H=half of the transition period=6/2=3 Long -term dividend growth rate, gL= 5% Short -term dividend growth rate, gS= 10% r= Expected rate of return, P0=((D0*(1+gL))/(r-gL))+((D0*H*(gS-gL)/(r-gL)) & Solving for r in an online equation solver, 100=((2*(1+0.05))/(r-0.05))+((2*3*(10%-5%)/(r-0.05)) we get r= 7.40% Expected return= 7.40% B. In case of mature growth phase right now both the growth rates are =5% Using the H-Model expression, Where, H=6/2=3 Long -term dividend growth rate, gL= 5% Short -term dividend growth rate, gS= 5% r= Expected rate of return, P0=((D0*(1+gL))/(r-gL))+((D0*H*(gS-gL)/(r-gL)) & Solving for r in an online equation solver, 100=((2*(1+0.05))/(r-0.05))+((2*3*(0.05-0.05)/(r-0.05)) we get r= 7.10% Expected return= 7.10% If the mature growth phase right now, its expected return will be lower, (7.1%, 7.4%) holding all other facts constant.
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