Hayden Ltd intends to make its first dividend payment 2 years(s) from now. It th

Question

Hayden Ltd intends to make its first dividend payment 2 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 3.1% p.a. in perpetuity. What would be your valuation of Hayden Ltd's shares, given you require a 15% p.a. return?

Explanation / Answer

D1 = 0

D2 = 5 cent

D3 = 5 cent

D4 = 5 cent

E1 = 0.20

E2 = 0.20 * (1.031)

E3 = 0.20 * (1.031)2

E4 = 0.20 * (1.031)3

E5 = 0.20 * (1.031)4

D5 = (0.20/2) * (1.031)4

D5 = 0.116491

P4 = D5/ (Required rate - Growth rate)

Growth rate = 3.1%

Required Rate = 15%

P4 = 0.116491/ (15% - 3.1%)

P4 = 0.9789

P0 = D1/ (1 + required rate) + D2/ (1 + required rate)2 + D3/ (1 + required rate)3 + D4/ (1 + required rate)4 + P4/ (1 + required rate)4 +

P0 = 0 + 0.05/ (1 + 15%)2 + 0.05/ (1 + 15%)3 + 0.05/ (1 + 15%)4 + 0.9789/ (1 + 15%)4

P0 = 0 + 0.038 + 0.033 + 0.029 + 0.560

P0 = $0.659 per share

P0 = $0.66 per share

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