Tellite Ltd,a telecommunication company,did not pay a dividend in the last financial year.However,the company has indicated that it expects to earn $1 per share in this financial year and to pay out 20% of these earnings in dividends.Financial analysts expect that Tellite's earnings per share and dividend per share will grow at a rate of 10% a year.The rate of return required by investors has been estimated at 12% per annum.Estimate the present value of the share.

Question

Quizplus · Accepted Answer

We can use the dividend discount model to estimate the present value of the share, which is based on the assumption that the price of a share is the present value of all future dividends.

First, we need to calculate the expected dividend per share in the next financial year:

Expected earnings per share = $1
Expected dividend payout ratio = 20%
Expected dividend per share = Expected earnings per share × Expected payout ratio = $1 × 20% = $0.20

Next, we can estimate the expected earnings and dividend growth rate:

Expected growth rate = 10%

Using these values, we can now calculate the present value of the share as follows:

PV = D1/(r-g)

where: 
PV = present value
D1 = expected dividend per share in the next financial year
r = rate of return required by investors
g = expected growth rate

PV = $0.20/(0.12-0.10) = $10

Therefore, the present value of the share is $10, which is option B.

Tellite Ltd,a Telecommunication Company,did Not Pay a Dividend in the Last