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magnificent miner is a mining startup.due to development costs of its new mine, no dividends will...

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Finance

magnificent miner is a mining startup.due to development costsof its new mine, no dividends will be paid for the first 5 years,after that they pay a $2 divident which wil grow by 10% per annumfor the nest five years, remaining contant thereafire, assummingthe reuierd return is 12% per annum , what is the share pricetoday?

(b) in five years time

(c) in 10 years time

Answer & Explanation Solved by verified expert
4.4 Ratings (741 Votes)

Expected dividend in each year:
D1 0
D2 0
D3 0
D4 0
D5 0
D6 2
D7 2+10% 2.2
D8 2.2+10% 2.42
D9 2.42+10% 2.66
D10 2.66+10% 2.93
D11 2.93+10% 3.22
D12 3.22
Horizon value of D11 = D12 / Required rate of return
3.22 / 12% = 26.83
Share price today:
Present value of cashflows
Year Cashflows PVF at 12% Present value
1 0 0.892857 0
2 0 0.797194 0
3 0 0.71178 0
4 0 0.635518 0
5 0 0.567427 0
6 2 0.506631 1.013262
7 2.2 0.452349 0.995168
8 2.42 0.403883 0.977397
9 2.66 0.36061 0.959223
10 2.93 0.321973 0.943382
11 3.22 0.292703 0.942503
11 26.83 0.292703 7.85322
Share price today: 13.68
Req b:
Share price after 5 years time:
In this case Year-6 will be treated as Year-1
Hence, share price will be as under:
Year Cashflows PF at 12% Present vaalue
1 2 0.892857 1.785714
2 2.2 0.797194 1.753827
3 2.42 0.71178 1.722508
4 2.66 0.635518 1.690478
5 2.93 0.567427 1.662561
6 3.22 0.506631 1.631352
6 26.83 0.506631 13.59291
Share price after 5 years time: 23.84
Req c:
Share price after 10 years
In this case, Year-11 will be taken as Year-1
Hence, shae price will be:
Year Cashflows PF at 12% Present vaalue
1 3.22 0.892857 2.875
1 26.83 0.892857 23.95536
Share price after 10 years 26.83
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